MASTER 

NEGATIVE 
NO.  95-82373- 1 3 


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Author: 


U.S.  Bureau  of 
Corporations 

Title: 

Summary  of  report  of  the 
commissioner  of... 

Place: 

Wasiiington,  D.C. 

Date: 

1913 


MASTER   NEGATIVE  • 


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Summary  of  report  of  the  commissioner  of  coi-pork^^ 
tions  on  the  International  harvester  co.  March  3,  1913. 
Washington,Trovt.  print,  off.,  1913. 


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Luther  Conant,  jr.,  commissioner. 


II  li.i~''"^^'°"*^  harvester  company.  i.  Conant,  Luther,  1872-  ^1 


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SUMMARY  OF  REPORT 


OF  THE 


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SCHOOL  O 
COMMISSIONER  OF  CORPORATIONS 


ON  THE 


INTERNATIONAL  HARVESTER  CO. 


MARCH  3,  1913 


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GOVERNMENT  PRINTING  OFFICE 
1913 


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SUMMARY  OF  REPORT 


OF  THE 


COMMISSIONER  OF  CORPORATIONS 


ON  THE 


INTERNATIONAL  HARVESTER  CO. 


MARCH  3,  1913 


LIBRARY 
SCHOOL  OF  BUSINESS 


WASHINGTON 
GOVERNMENT  PRINTING  OFFICE 
1913 


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LETTER  OF  SUBMITTAL. 


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Department  of  Commerce  and  Labor, 

Bureau  op  Corporations, 
Washington,  March  3,  1913, 
ISir:  I  have  the  honor  to  submit  herewith  a  report  on  the  Inter- 
national Harvester  Co. 


m  ORGANIZATION   OF  INTERNATIONAL   HARA-ESTER  CO. 

The  International  Harvester  Co.  was  organized  in  1902  as  a  con- 
solidation of  the  five  principal  manufacturers  of  harvesting  machines 
in  the  United  States,  namely,  the  McCormick  Harvesting  Machine 
Co.,  Deering  Harvester  Co.,  Piano  Manufacturing  Co.,  the  Warder, 
liushnell  &  Glessner  Co.,  and  the  Milwaukee  Harvester  Co.  The 
companies  thus  consolidated  had  in  1902  about  90  per  cent  of  the 
total  production  of  grain  binders  in  the  United  States,  and  about  80 
per  cent  of  the  total  production  of  mowers,  the  two  chief  kinds  of 
haiTesting  machines.  The  principal  outside  makers  of  harvesting 
machines  were  located  in  New  York  State,  and  their  market  was 
chiefly  confined  to  the  North  Atlantic  States  and  to  the  export  trade. 

The  interests  included  in  the  combination  had  previously  been  in 
keen  competition.  An  attempt  made  in  1890  to  establish  a  general 
consolidation  of  makers  of  harvesting  machines  was  a  failure,  and 
from  that  time  until  the  merger,  competition  was  severe.  In  fact,  it 
has  been  asserted  that  the  combination  was  virtually  forced  by  such 
competition.  However,  the  two  most  important  concerns,  namely, 
the  McCormick  and  Deering  companies,  were  making  large  profits 
just  prior  to  the  merger,  and  two  of  the  other  companies  merged  were 
making  at  least  fair  profits.  Obviously,  therefore,  it  can  not  be  con- 
tended that  this  competition  was  destructive. 

It  has  been  represented  in  formal  testimony  by  officers  of  the  com- 
pany and  its  financial  promoter,  G.  W.  Perkins,  then  of  the  firm  of 
J.  P.  Morgan  &  Co.,  that  its  organization  was  not  the  result  of  con- 
certed action  by  the  former  competing  owners,  but  merely  of  the 
purchase  of  their  properties  by  new  and  outside  interests.  Docu- 
mentary evidence  gathered  by  the  Bureau  completely  disposes  of  this 
contention  and  shows  that  the  principal  competing  interests  con- 
sidered and  discussed  among  themselves  the  formation  of  this  combi- 
nation and  were  active  in  bringing  it  about. 


TV 


LETTER  OF  SUBMITTAL. 


The  chief  features  of  the  International  Harvester  Co.'s  operations 
are  the  substantial  maintenance  of  its  monopolistic  position  in  the 
harvesting-machine  business,  originally  acquired  through  combina- 
tion, and  its  extensions  on  a  large  scale  into  new  lines  of  the  farm- 
machinery  industry.  The  company  has  been  able  to  do  this  in  part 
through  the  acquisition  of  some  of  its  chief  rivals  in  the  harvesting- 
machine  business;  in  part  by  using  its  monopolistic  advantage  in 
these  harvesting-machine  lines  to  force  the  sale  of  its  new  lines;  in 
part  by  certain  objectionable  competitive  methods;  and  especially 
through  its  exceptional  command  of  capital,  itself  the  result  of  com- 
bination. 

ACQUISITIONS   OP  COMPETING   CONCERNS. 

Almost  immediately  after  its  organization  the  International  Har- 
vester Co.  commenced  the  acquisition  of  competing  makers  of  har- 
vesting machines.  In  January,  1903,  it  secretly  acquired  control  of 
D.  M.  Osborne  &  Co.,  of  Auburn,  N.  Y.,  its  chief  competitor.  This 
secret  control  was  maintained  for  nearly  two  years,  during  which 
the  Osborne  company  was  operated  and  advertised  as  an  inde- 
pendent concern.  Two  of  the  chief  stockholders  of  the  Osborne 
company  agreed  to  refrain  from  engaging  independently  in  the 
same  lines  of  business  for  a  period  of  10  years.  Again,  the  combina- 
tion, between  1903  and  1904,  acquired  and  secretly  operated  several 
other  competing  harvesting-machine  concerns,  namely,  the  Minnie 
Harvester  Co.,  the  Aultman-Miller  Co.,  and  the  Keystone  Co.  In 
some  cases  it  was  contended  that  the  concealment  of  ownership  was 
employed  to  facilitate  liquidation  of  certain  accounts  of  the  purchased 
concerns. 

Negotiations  for  the  acquisition  of  several  other  harvesting-ma- 
chine concerns  were  not  consummated;  in  some  cases  the  initiative 
came  from  the  competitors. 

EXTENSIONS   INTO   NEW   LINES. 

The  company's  acquisition  of  competitors  in  harvesting  machines 
was  followed  by  extension  of  its  manufacture  into  numerous  new 
lines,  partly  by  the  purchase  of  established  concerns.  Among  the 
most  important  of  such  lines  were  tillage  implements,  manure 
spreaders,  farm  wagons,  gasoline  engines,  tractors,  and  cream  sepa- 
rators. The  extension  of  the  company  into  these  lines  was  directly 
furthered  by  its  substantially  monopolistic  control  of  the  harvest- 
ing-machine business.  It  is  obvious  that  the  possession  of  a  monopo- 
listic position  in  that  important  branch  of  the  business  afforded  a 
powerful  lever  for  forcing  the  sale  of  its  new  lines. 


LETTER  OF   SUBMITTAL. 


COMPETITIVE   METHODS. 


The  competitive  methods  employed  by  the  company  have  been 
the  subject  of  much  complaint.  Some  of  these  complaints  relate  to 
practices  which,  like  the  use  of  the  exclusive  clause  in  agency  con- 
tracts and  the  operation  of  purchased  companies  as  independent, 
were  at  one  time  extensively  practiced,  but  which  have  since  been 
abandoned.  As  above  noted,  some  of  these  acquired  concerns  were 
openly  advertised  as  independent. 

Among  the  most  important  complaints  charged  against  the  com- 
pany in  recent  years  is  an  effort  to  secure  an  undue  proportion  of 
local  dealers  in  farm  machinery  by  allotting,  as  a  rule,  only  a  single 
brand  to  any  one  dealer  in  the  same  place,  thus  tending  to  restrict 
the  outlet  for  coippetitors'  goods.  The  company's  own  records  show 
that  this  was  one  purpose  at  least  in  making  this  distribution  of  its 
brands,  and  it  appears  to  have  had  some  practical  effect  in  handicap- 
ping competition. 

Compulsion  of  dealers  to  take  the  company's  "  new  "  lines  by  reason 
of  its  monopolistic  control  of  harvesting  machines  ("  full-line  forc- 
ing ")  has  been  attempted  with  more  or  less  success  by  the  company's 
representatives.  Attempts  to  secure  the  exclusive  handling  of  cer- 
tain lines  of  the  company  by  similar  methods  were  also  reported  to 
the  Bureau. 

Special  discriminatory  prices  and  terms  have  been  reported  in  a 
number  of  instances,  but  the  general  policy  of  the  company  is  to 
maintain  high  prices  in  the  monopolized  lines;  in  the  principal  new 
lines,  however,  where  considerable  competition  is  encountered,  un- 
usually low  prices  and  long  terms  have  been  generally  employed. 

Another  rather  general  complaint  is  that  salesmen  of  the  Inter- 
national Harvester  Co.  represent  that  purchasers  of  competing  lines 
of  harvesting  machines  will  be  unable  to  secure  repair  parts,  a  mat- 
ter of  much  practical  importance.  Officers  of  the  International 
Harvester  Co.  admit  that  this  was  at  one  time  a  common  charac- 
teristic of  competition  in  the  harvesting-machine  industry,  but  that 
the  company  is  opposed  to  the  practice  and  has  used  active  efforts 
to  eliminate  it.  The  Bureau,  however,  received  rather  numerous 
complaints  of  this  character. 

The  company  at  one  time  openly  attempted  through  a  clause  in 
its  commission  contracts,  to  control  the  price  paid  for  its  machines 
by  the  farmer  to  the  retail  dealer.  Since  the  elimination  of  this 
clause,  "suggested"  retail  price  lists  have  been  rather  generally 
circulated  by  some  of  its  branch  offices,  apparently  for  the  purpose 
of  indirectly  maintaining  the  retail  price,  although  the  company 
contends  that  these  lists  are  intended  for  the  use  of  its  employees 


VI 


LETTER  OP  SUBMITTAL. 


LETTEB  OF  SUBMITTAL. 


vn 


in  furnishing  information  to  purchasers  and  professes  to  discourage 
their  issuance  to  dealers.  It  is  evident,  however,  that  it  could  com- 
pletely stop  this  practice  if  it  really  wished  to. 

SUPERIOR  RESOURCES. 

The  company's  exceptional  financial  resources,  including  its  con- 
nections with  J.  P.  Morgan  &  Co.  and  John  D.  Rockefeller,  constitute 
one  of  the  chief  sources  of  its  power.  They  not  only  enable  it  to 
secure  the  economies  of  large-scale  operations,  which,  as  a  rule,  give 
it  marked  advantages  in  manufacturing  costs,  but  also  enable  it  to 
maintain  a  very  elaborate  selling  organization,  by  virtue  of  the 
variety  and  extent  of  its  business.  Furthermore,  they  give  it  a  great 
advantage  in  extending  credits  to  purchasers,  an  exceedingly  im- 
portant feature  of  the  farm-machinery  industry.  Wliile  apparently 
any  such  use  of  credits  has  not  been  a  controlling  factor  in  restricting 
competition,  it  appears  to  have  been  felt  to  some  extent  in  certain 
lines,  and  is  one  of  the  chief  sources  of  complaint  from  manufac- 
turers as  distinct  from  dealers  in  farm  machinery. 

PRESENT  POSITION. 

As  a  result  of  the  developments  and  practices  above  described,  the 
position  of  the  combination  has  changed  from  that  of  a  maker  of 
harvesting  machines  only,  until  it  is  now  an  important  factor  in 
several  other  branches  of  the  farm-machinery  business.  In  manure 
spreaders  it  appears  to  have  over  one-half  of  the  business,  and  in 
disk  harrows  approximately  40  per  cent;  and  it  is  increasing  its 
proportion  in  several  other  new  lines,  such  as  wagons  and  gasoline 
engines. 

New  competition  has,  however,  begun  to  appear,  especially  from 
certain  large  plow  and  tillage-implement  makers,  whose  fields  have 
been  invaded  by  the  combination,  and  who  likewise  have  arranged 
to  establish  a  "  full  line ; "  that  is,  a  large  assortment  of  the  chief 
kinds  of  farm  implements.  This  new  competition  is  apparently  of 
great  significance.  However,  in  1911  the  company  still  had  about 
86  per  cent  of  the  production  of  binders,  78  per  cent  of  the  produc- 
tion of  mowers,  and  72  per  cent  of  the  production  of  rakes. 

INVESTMENT  AND  CAPITALIZATION. 

The  extraordinary  overcapitalization  which  characterized  most  of 
the  large  industrial  consolidations  of  the  period  1898  to  1901  was 
absent  in  the  case  of  the  International  Harvester  Co.  The  original 
capital  stock  was  $120,000,000.  The  "cash  stock"  of  $60,000,000 
appears  to  have  been  paid  up  in  full.  The  appraisal  value  of  the 
plants,  inventories,  etc,  for  which  the  remaining  $60,000,000  of  stock 


was  issued  was  $67,000,000;  the  Bureau  places  the  value  of  these 
physical  properties  at,  roughly,  $49,000,000.  The  bankers  and  pro- 
moters received  $3,700,000  stock  for  their  expenses  and  services. 

It  is  worth  noting  that  certain  ore  leaseholds  acquired  by  the 
Deerings  about  seven  months  before  the  merger  for  $675,000,  of 
which  $500,000  was  paid  in  notes,  were  valued  for  purposes  of  con- 
solidation, after  deduction  of  this  indebtedness,  at  no  less  than 
$7,963,000.  The  price  paid  by  the  Deerings  was  rather  more  than 
ihe  current  average  value  of  Mesabi  leases  at  the  time.  It  is  claimed 
that  during  the  period  that  the  Deerings  had  owned  these  leases  there 
had  been  some  increase  in  the  estimated  tonnage  of  these  ore  prop- 
erties, but  no  evidence  was  produced  to  indicate  any  great  increase  in 
their  value.  However,  in  order  not  to  undervalue  them,  the  Bureau 
arbitrarily  allowed  an  increase  of  $500,000,  and  also  added  about 
$100,000  expended  for  improvements,  etc.  This  is  probably  too  lib- 
eral, but  the  resulting  net  valuation  is  over  $7,000,000  less  than  that 
claimed  by  the  International  Harvester  Co.  The  high  valuations 
placed  on  these  ore  properties  caused  much  dissatisfaction  among  the 
combining  interests  themselves,  especially  on  the  part  of  the  McCor- 
micks.  The  banking  interests  back  of  the  International  Harvester 
Co.,  however,  had  only  a  few  weeks  earlier  claimed  an  extravagant 
value  for  ore  in  defending  the  capitalization  of  the  United  States 
Steel  Corporation  in  important  litigation  then  pending,  and  they 
were  therefore  in  no  position  to  deny  excessive  valuations  for  this 
Deering  ore. 

In  several  other  respects  the  appraisal  valuations  were  clearly 
excessive.  However,  after  deducting  such  excesses,  the  Bureau,  as 
indicated,  found  that  the  value  of  the  physical  properties  plus  the 
working  capital  covered  substantially  90  per  cent  of  the  capital  stock 
issued.  The  company  claimed  a  large  value  for  good  will,  but  has 
not  entered  any  good-will  value  in  its  accounts.  It  is  not  unlikely 
that  a  fair  valuation  for  good  will  would  have  covered  the  difference 
between  the  original  capitalization  and  the  tangible  assets. 

A  much  larger  capitalization  was  at  one  time  contemplated.  For 
purposes  of  consolidation,  the  fixed  properties,  good  wiU,  and  in- 
ventories, exclusive  of  working  capital,  were  nominally  valued  in  the 
first  instance  at  $132,000,000.  This  figure,  however,  was  grossly  ex- 
cessive. Furthermore,  the  subsequent  appraisal  value  of  the  physical 
properties  (excluding  good  will)  of  $67,000,000,  above  noted,  was 
later  written  down  to  $60,000,000.  In  this  connection  it  may  be 
noted  that  inventories  which  were  appraised  at  $25,550,000  were  later 
reduced  for  "  trading  purposes  "  to  $18,155,000. 

In  1907  the  capital  stock  was  rearranged  by  making  $60,000,000  a  7 
per  cent  preferred  issue,  leaving  the  common  stock  at  $60,000,000. 


vm 


LETTEB  OF  SUBMITTAL. 


\ 

■  \ 


In  1910  $20,000,000  additional  common  stock  was  issued  as  a  stock 
dividend,  making  the  total  capitalization  $140,000,000. 

The  stock  of  the  company  has  been  closely  held  by  the  former 
interests.  The  McCormick  and  Deering  families  have  throughout 
held  a  large  majority  of  the  total  stock,  while  considerable  amounts 
have  also  been  retained  by  a  few  other  stockholders.  This  fact 
assumes  especial  importance  in  view  of  the  pending  dissolution  suit 
of  the  Government  against  the  company. 

Recently,  as  a  result  of  this  suit,  the  company  has  been  split  into 
two  corporations,  one  of  which,  the  International  Harvester  Co  of 
New  Jersey,  retains  the  old  harvesting-machine  plants  and  related 
business;  ih^  other,  the  International  Harvester  Corporation,  takes 
over  the  new  lines  and  foreign  business.  Each  of  these  concerns  is 
capitahzed  at  $70,000,000.  If  this  is  intended  as  part  of  a  plan  for 
ultimate  disintegration  of  the  combination,  in  the  opinion  of  the 
Bureau  it  is  unsatisfactory. 

PROFITS. 

^  There  has  been  a  marked  increase  in  the  earnings  of  the  Interna- 
tional  Harvester  Co.  From  a  distinctly  low  rate  early  in  its  organi- 
zation  they  have  risen  to  a  rather  high  rate  in  recent  years.  For 
the  entire  period  1902  to  1911  the  average  rate  of  net  earnings  on 
net  assets,  as  computed  oy  the  Bureau  (exclusive  of  good  will),  is  8 J 
per  cent.  However,  for  the  three  years  1909  to  1911  the  average  was 
12^  per  cent.  As  computed  by  the  company  on  capital  stock  and  sur- 
plus, the  average  for  the  entire  period  is  7^  per  cent,  and  for  the 
years  1909  to  1911,  lOJ  per  cent.  The  rate  in  1911  was  somewhat  less 
than  m  1909.    Returns  for  1912  are  not  yet  available. 

The  increase  in  recent  years  is  more  significant  because  in  certain 
of  the  new  lines,  which  the  company  has  been  pushing  aggressively, 
the  rate  of  return  is  comparatively  low.  This  means  that  the  rate  of 
return  on  some  of  the  older  monopolized  lines  has  been  very  high. 
Thus,  the  rate  of  profit  for  grain  and  grass  harvesting  machines  is 
very  much  higher  than  the  rates  for  such  lines  as  wagons  and  ma- 
nure  spreaders,  where  the  company  encounters  a  greater  degree  of 
competition ;  and  the  same  is  true  of  twine.  The  rate  on  some  of  the 
new  lines,  however,  has  been  liberal. 

Generally  speaking,  the  prices  obtained  by  the  company  on  foreign 
sales  are  relatively  higher  than  those  in  the  domestic  market,  but 
claims  made  by  the  company  that  the  net  return  is  invariably  greater 
were  not  sustained  by  its  records;  in  some  important  instances  at 
least  the  foreign  nettings  were  lower  than  the  domestic. 


LETTER  OF   SUBMITTAL.  K-^»»' 


OONCLITSION. 


New  V»rk 


rsity 


It  appears,  therefore,  that  the  International  Harvester  Co.'s  posi- 
tion in  the  industry  is  chiefly  attributable  to  a  monopolistic  combina- 
tion in  the  harvesting-machine  business,  certain  unfair  competitive 
methods,  and  superior  command  of  capital. 
Very  respectfully, 

Luther  Conant,  Jr., 
Commissioner  of  Corporations. 
The  President. 


i 


i\ 


REPORT  OF  THE  COMMISSIONER  OF  COKPORATIONS 
ON  THE  INTERNATIONAL  HARVESTER  CO. 


SIBIMARY. 


This  investigation  was  conducted  in  pursuance  of  a  resolution  of 
the  United  States  Senate  which  directed  especial  attention  to  the  oper- 
ations of  the  International  Harvester  Co.,  and  to  the  question  whether 
there  existed  among  local  dealers  in  farm  machinery  a  healthy  com- 
petition. On  the  latter  subject  a  more  detailed  report  is  contem- 
plated later.  The  essential  features  of  the  operations  of  the  Inter- 
national Harvester  Co.,  as  developed  by  the  investigation,  are: 

A  substantially  monopolistic  position — 85  per  cent  of  the  total 
output — in  the  harvesting-machine  business  proper  at  the  beginning. 

.Organization  of  combination  terminated  a  long  period  of  severe, 
but  by  no  means  destructive,  competition  among  the  concerns  merged. 

Combination  arranged  by  the  former  owners  in  connection  with 
bankers,  and  not,  as  frequently  asserted,  a  mere  sale  of  their  proper- 
ties to  new  interests. 

An  absence  of  important  overcapitalization.  Substantially  90  per 
cent  of  the  original  $120,000,000  capital  stock  covered  by  tangible 
property  and  working  capital.  There  was  in  addition  a  considerable 
real  good  will. 

Acquisitions  of  competitors  and  extensions  into  new  lines,  until 
to-day  the  company  is  also  an  important  factor  in  certain  other 
branches  of  the  farm-machinery  industry. 

Low  rates  of  profit  in  early  years,  partly  owing  to  imperfect  or- 
ganization and  internal  jealousies,  but  much  higher  rates  in  recent 
years,  averaging  about  12J  per  cent  in  1909-1911  on  net  assets  (exclu- 
sive of  good  will)  as  estimated  by  the  Bureau. 

Much  higher  rates  of  profit  on  investment  in  highly  monopolized 
lines,  such  as  harvesting  machines,  than  in  certain  "  new  "  lines,  i.  e., 
wagons,  manure  spreaders,  etc 

Prices  of  machines  sold  in  foreign  markets  generally  higher  to 
retailer  and  farmer  than  in  United  States,  but  in  some  cases  a  lower 
margin  of  profit  in  export  trade. 


» 


\ 


2  REPORT  ON   THE  INTERNATIONAL  HARVESTER  CO. 

Low  manufacturing  costs  of  harvesting  machines  compared  with 
the  average  costs  of  independents;  an  elaborate  selling  organization 
and  abihty  to  grant  extensive  credits  to  purchasers.  These  advan- 
tages due  to  large  volume  of  business  and  superior  financial  resources 

Extensive  use  especially  in  early  years  of  objectionable  competitive 
practices,  e.  g.,  the  exclusive  clause  in  dealers'  contracts  (later  aban- 
doned),  monopolization  of  dealers,  "full  line  forcing,"  discrimina. 
tory  price  concessions,  attempted  control  of  retail  prices.  These 
methods  less  extensively  practiced  in  recent  years,  but  still  the  source 
of  much  complaint.  Of  over  800  dealers  interviewed  by  the  Bureau, 
about  one-half  criticised  unfavorably  the  company's  methods;  some' 
of  these  complaints  unimportant. 

Eecent  expansion  by  some  of  the  largest  makers  of  farm  implements 
into  the  harvesting-machine  business,  making  them,  like  the  Inter- 
national Harvester  Co.,  "  full-line  concerns."  This  development  ap- 
parently one  of  great  importance. 

Monopolistic  position  of  the  International  Harvester  Co.  in  har- 
vesting  machines  thus  far  substantially  maintained,  while  it  now 
controls  a  considerable  and  increasing  percentage  of  the  business  in 
new  lines. 

CONDITIONS  LEADING  UP  TO  ORGANIZATION  OF  INTERNATIONAL 

HARVESTER  CO. 

The  International  Harvester  Co.  was  organized  in  August,  1902 
under  New  Jersey  laws,  as  a  consolidation  of  the  following  coni- 
panies : 

McCormick  Harvesting  Machine  Co. 

Deering  Harvester  Co.  (a  partnership). 

Warder,  Bushnell  &  Glessner  Co.  (Champion). 

Piano  Manufacturing  Co. 

Milwaukee  Harvester  Co. 
These  concerns  were  the  principal  manufacturers  of  harvestim^ 
machines.  In  fact,  the  only  other  important  manufacturers  of  such 
machines  were  a  few  companies  located  in  New  York  State,  engaged 
largely  in  trade  with  foreign  markets,  none  of  which  did  an  extensive 
business  in  the  principal  domestic  market  for  harvesting  machines, 
namely,  the  grain-producing  States  of  the  Mississippi  River  basin. 

The  organization  of  the  company  followed  a  long  period  of  keen 
competition  among  manufacturers  of  harvesting  machines.  An 
earlier  attempt  (in  1890)  to  bring  about  a  general  consolidation  of 
the  principal  manufacturers  of  such  machines  proved  abortive. 
Although  a  temporary  organization  was  effected  in  that  year  under 
the  name  of  the  American  Harvester  Co.,  with  $35,000,000  authorized 
capital  stock,  this  had  hardly  been  accomplished  before  the  scheme 
fell  through.    From  that  time  down  to  the  organization  of  the  Inter- 


.r 

^5 


IHBI*^ 


SUMMARY.  S 

national  Harvester  Co.,  the  harvesting-machine  industry  appears  to 
have  been  peculiarly  free  both  from  efforts  at  consolidation  and  also 
from  the  ordinary  price  agreements  which  were  characteristic  of 
many  industries.  In  fact,  the  formation  of  the  International  Har- 
vester Co.  has  repeatedly  been  attributed  by  some  of  its  principal 
officers  to  the  severity  of  competition  during  this  period. 

Cyrus  H.  McCormick,  president  of  the  company,  in  testimony  in 
judicial  proceedings  in  Missouri  in  1908,  described  this  competition 
as  "  fierce,"  and  stated  that  a  desire  to  remove  what  he  termed  "  un- 
businesslike methods  "  was  one  of  the  principal  reasons  for  forming 
the  consolidation.  He  further  stated  that  during  this  period  of  com- 
petition a  large  portion  of  the  sales  of  the  competing  companies  were 
made  below  the  listed  prices. 

Again,  J.  J.  Glessner,  formerly  of  the  Warder,  Bushnell  &  Gless- 
ner Co.,  makers  of  the  Champion  machines,  referred  to  the  competi- 
tion as  a  "  bitter  fight,"  stating  that  his  concern  did  everything  that 
it  possibly  could  to  prevent  its  competitor  from  making  a  sale. 

Still  again,  W.  H.  Jones,  formerly  of  the  Piano  Manufacturing  Co., 
stated  explicitly  that  the  merger  was  organized  to  abolish  ''fierce 
competition."  This  is  shown  by  the  following  excerpt  from  his 
testimony  in  the  Missouri  proceedings : 

Q.  So  in  order  to  get  rid  of  this  fierce  competition  you  formed 
this  new  organization  ?— A.  We  had  to  do  it  or  wind  up  the  busi- 
ness. If  we  had  not,  we  would  have  thrown  all  our  men  out  of 
employment.  The  best  thing  to  do  was  to  get  rid  of  the  fierce 
competition,  to  get  rid  of  the  waste  of  money  in  canvassers.  We 
have  not  half  as  many  canvassers  to-day  as  we  did  have. 

Q.  The  canvassers  were  necessary  to  maintain  your  competi- 
tion ? — A.  Before  that,  we  did  it  to  beat  one  another  out  of  busi- 
ness. 

Q.  Is  that  not  what  you  call  competition? — A.  Pretty  sharp 
competition. 

Q.  It  was  to  get  rid  of  that  you  made  your  combination? — 
A.  Yes,  sir ;  to  better  the  entire  thing ;  no  question  about  that. 

Wliile  it  has  also  been  claimed  that  economies  of  consolidation  and 
the  possibility  of  developing  more  satisfactorily  the  export  trade 
were  likewise  considerations  in  bringing  about  the  merger,  it  may  be 
accepted  as  established  that  the  principal  reason  for  the  formation 
of  the  International  Harvester  Co.  was  the  elimination  of  the  com- 
petition complained  of. 

The  severity  of  this  competition  has  frequently  been  set  forth  as 
a  full  justification  for  the  combination.  It  is  important  to  point  out, 
therefore,  that  notwithstanding  this  competition  the  profits  in  the 
business  were  large.  Thus,  the  profits  of  the  five  combining  concerns 
during  the  five  years  1898-1902  aggregated  nearly  $43,000,000,  or  an 
average  of  nearly  $8,600,000  a  year.  In  the  case  of  the  McCormick 
concern,  the  profits  for  the  year  preceding  the  merger  exceeded  12  per 


4  BEPORT  ON   THE  INTERNATIONAL  HARVESTER  CO. 

cent  of  the  net  assets  as  shown  by  its  books,  while  those  of  the  Deering 
business  were  nearly  18  per  cent  of  such  book  assets,  and  those  of  the 
Milwaukee  Harvester  Co.  over  11  per  cent.  Data  for  comparisons  in 
the  case  of  the  other  two  companies  are  not  available,  but  the  profits 
of  these  apparently  were  smaller.  These  1902  profits  may  have  some- 
what overstated  the  net  earnings  available  for  dividends,  and  the 
book  assets  are  not  an  entirely  satisfactory  criterion  for  judging  their 
exact  significance,  but  it  is  certain  that  such  profits  were  liberal. 
During  this  interval,  moreover,  there  was  a  very  great  expansion  in 
the  voluine  of  business  of  these  companies.  It  is  apparent,  therefore, 
that  while  competition  was  severe  it  was  by  no  means  destructive. 

It  may  be  noted  that  many  of  the  basic  patents  for  harvesting  ma- 
chinery  had  expired,  and  were  open  to  all  who  cared  to  engage  in  the 
manufacture  of  such  machinery. 

METHODS  BY  WHICH  THE  COMPANY  WAS  OBGANIZED. 

Representatives  of  the  company,  and  particularly  of  its  financial 
organizers,  have  repeatedly  insisted,  at  times  in  sworn  testimony,  that 
the  combination  was  not  brought  about  by  the  concerted  action  of  the 
interests  united,  but  instead  that  the  five  concerns  were  purchased 
independently  the.one  of  the  other  by  the  banking  interests,  and  sub- 
sequently merged  into  a  single  organization. 

These  assertions  may  be  sufficiently  disposed  of  by  citing  from  a 
statement  made  by  Stanley  McCormick  and  Cyrus  Bentley,  legal 
counsel  of  the  McCormicks,  to  G.  W.  Perkins  on  June  27,  1902,  in 
New  York  City,  and  confirmed  by  a  typewritten  memorandum  left 
with  Mr.  Perkins  after  having  been  revised  at  the  head  offices  of  the 
McCormick  concern.  This  statement,  which  is  given  in  full  in  this 
report,  contained  repeated  references  to  conferences  between  repre- 
sentatives of  the  harvesting  machine  companies  themselves,  as  the 
following  excerpts  show : 

The  McCormick  and  Deering  people,  in  talking  over  how  they 
might  get  together,  estimated  in  the  matter  of  good  will  that 
about  two  average  years'  profits  ought  to  represent  the  good 
will  of  each  company's  business.  In  negotiations,  not  a  CTeat 
while  ago,  the  Deerings  rather  expressed  the  opinion  that  if  the 
McCormick  and  Deerinff  companies  were  to  come  together  it 
ought  to  be  on  a  basis  of  about  53  for  the  McCormick  companv 
and  47  for  the  Deering,  while  the  McCormicks'  figures  had  been 
anywhere  from  55  to  60  for  the  McCormick  company  and  40 
to  45  for  the  Deering  company.     ♦     ♦     ♦ 

nT^^i^T^^^if  ^tPJ  if  president  of  this  [the  Champion]  company. 
Mr.  Harold  McCormick  saw  hun  three  or  four  weeks  ago  and 
sounded  him  as  to  what  he  would  think  of  the  several  harvesting 
machine  companies  getting  together.  Mr.  Glessner  seemed  to 
be  very  much  interested  m  having  it  done,  and  said  that  his 


SUMMABY. 


F.en 
Coiuiribi.4 


V%rk 


vtrsiiy 


company  would  not  be  particular  as  to  details  or  as  to  what 
influence  would  predominate.    *    ♦    ♦ 

Mr.  W.  H.  Jones  is  president  of  this  [the  Piano]  company,  and 
is  the  dominating  influence.  Mr.  O.  W.  Jones,  his  brother,  is 
vice-president.  He  visited  Mr.  McCormick  about  four  weeks 
ago,  and  in  a  casual  way  asked  if  something  could  not  be  done 
in  the  way  of  combination.  He  remarked :  "  If  you  and  I  were 
appointed  a  committee  of  two  to  put  this  through,  it  wouldn't 
take  us  a  week  to  wind  it  up  " — ^giving  the  impression  that  he  was 
anxious  to  see  it  put  through.    *    *    ♦ 

Mr.  Deering  has  approached  both  the  Piano  and  Champion 
companies,  but  so  far  as  is  known  he  has  no  option  on  either 
one.  ♦  ♦  ♦  The  Deerings  have  indicated  that  they  would 
prefer  not  to  sell  for  cash,  but  would  take  securities  and"  keep  an 
interest  in  the  management  of  the  new  organization. 

Mr.  Deering  has  urged  that  the  whole  trade  be  taken  into  the 
combination.  Against  this  it  has  been  suggested  to  him  that  if 
only  90  per  cent  were  brought  in,  it  wouM  be  quite  possible  to 
deal  with  another  of  the  minor  companies  if  any  one  made  ex- 
cessive demands.  That  is,  no  minor  company  is  probably  essen- 
tial to  the  combination,  although  the  five  named  are  undoubtedly 
the  most  desirable. 

It  is  therefore  conclusively  established  by  documentary  evidence 
that  a  consolidation  of  the  five  leading  harvesting- machine  makers 
had  been  considered,  not  merely  by  the  bankers,  but  actively  con- 
sidered and  discussed  by  the  leading  interests  themselves,  and  this 
for  a  considerable  period  prior  to  the  organization  of  the  company. 
These  discussions  had  specifically  covered  the  relative  values  of  some 
of  the  combining  companies,  the  policy  to  be  adopted  with  respect 
to  other  concerns  than  the  five  mentioned,  and  also  the  question  as 
to  who  should  have  a  controlling  interest  in  the  new  organization. 
Moreover,  the  McCormick  interests  assisted  the  bankers  in  arranging 
for  the  acquisition  of  the  Milwaukee  Harvester  Co. 

TERMS  OF  CONSOLTOATION. 

The  process  by  which  the  merger  was  actually  accomplished  in- 
volved a  number  of  formal  legal  transactions.  On  July  28,  1902, 
four  separate  agreements  were  entered  into  between  the  McCormick, 
Deering,  Piano,  and  Champion  concerns,  respectively,  called  the 
"  vendors,"  and  William  C.  Lane,  called  the  "  purchaser,"  all  in  sub- 
stantially the  same  general  form,  but  differing  in  certain  details. 
These  contracts  set  forth  that  the  respective  vendors  were  the  owners 
of  certain  plants  for  the  manufacture  of  harvesting  machines,  and 
that  Lane,  the  purchaser,  desired  to  acquire  them  for  the  purpose  of 
selling  them  to  a  company  to  be  formed  subsequently,  and  referred 
to  as  the  "  purchasing  company."  In  pursuance  of  these  contracts 
and  supplemental  contracts  of  August  11,  1902,  it  was  arranged 


\ 


6 


BEFOBT   ON   THE   INTERNATIONAL  HARVESTER  CO. 


that  for  the  plants  and  other  physical  properties  thus  conveyed, 
together  with  the  entire  property  of  the  Milwaukee  Harvester  Co., 
which  was  put  in  by  the  bankers  as  a  going  concern,  and  for  the 
payment  of  the  bankers'  commission,  $60,000,000  of  stock  was  to 
be  issued.  An  additional  $60,000,000  of  stock  was  to  be  issued  for 
$60,000,000  cash.  Of  this  amount  $19,000,000  was  to  be  contrib- 
uted by  the  bankers  and  their  associates,  and  $41,000,000  by  the 
four  vendor  companies,  as  follows:  McCormick,  $20,000,000;  Deer- 
ing,  $16,000,000;  Piano,  $4,000,000;  Champion,  $1,000,000.  By  a 
subsequent  arrangement,  however,  the  McCormick  and  Deering  in- 
terests agreed  to  contribute  about  $9,000,000  additional  working  capi- 
tal, so  that  only  about  $10,000,000  was  directly  raised  by  the  bankers. 
The  payment  of  most  of  the  working  capital  provided  by  the  vendor 
companies  was  arranged  through  the  assignment  of  bills  receivable 
for  collection. 

The  contracts  further  provided  that  the  purchase  price  of  the  phys- 
ical properties  should  equal  their  appraised  value.  Provision  was 
made  for  valuing  the  good  will  on  the  basis  of  two  years'  profits, 
plus  10  per  cent.    These  arrangements  were  subsequently  modified 

by  additional  contracts. 

Immediately  after  the  contracts  of  August  11,  1902,  were  entered 
into,  the  International  Harvester  Co.  was  organized  by  a  group  of 
temporary  or  "  dummy  "  incorporators,  the  certificate  of  incorporation 
being  filed  in  New  Jersey  on  August  12,  1902.  Temporary  directors 
were  elected,  who  at  once  took  under  consideration  a  written  offer 
from  W.  C.  Lane  to  transfer  the  plants,  good  will,  and  other  prop- 
erty, excluding  receivables,  of  the  McCormick,  Deering,  Piano,  and 
Champion  concerns,  together  with  the  Milwaukee  company  as  a 
whole,  and  working  capital  of  $60,000,000.  The  plants,  good  will, 
etc.,  were  nominally  valued  at  $132,000,000,  thus  making  a  total  nom- 
inal value  of  $192,000,000.  In  payment  therefor  Mr.  Lane  offered  to 
accept  the  entire  capital  stock  of  the  International  Harvester  Co., 
namely,  $120,000,000  par  value,  subject  to  a  provision  that  if  any 
additional  stock  were  issued  by  the  company  prior  to  July  1,  1903, 
on  account  of  the  nominal  surplus  of  $72,000,000,  then  this  original 
$120,000,000  of  common  stock  should  become  preferred  stock  and  the 
additional  stock  should  be  common  stock,  to  be  issued  to  the  holders 
of  the  preferred,  pro  rata. 

On  August  13,  1902,  W.  C.  Lane  and  E.  H.  Gary  (chairman  of 
the  United  States  Steel  Corporation)  appeared  before  the  temporary 
board  of  directors  and  explained  Lane's  offer,  which  was  promptly 
accepted.  Resolutions  were  adopted  to  the  effect  that  the  properties 
and  working  capital  were  worth  the  amount  stated  by  Lane  ($192,- 
000,000),  and  that  the  treasurer  should  enter  the  proper  amounts  in 
the  books  of  account,  including  a  surplus  of  $72,000,000. 


SUMMARY.  7 

This  surplus  of  $72,000,000  was  entirely  arbitrary,  and,  in  fact, 
wholly  fictitious.  It  is  obvious  that  at  the  time  it  had  not  been  defi- 
nitely decided  whether  the  company  should  be  organized  with  a 
capitalization  approximately  commensurate  with  the  value  of  its 
assets  or  whether  it  should  issue  stock  greatly  in  excess  of  that 
capitalization. 

On  the  same  day  (August  13)  the  new  stockholders  took  control 
of  the  company.  The  temporary  directors  resigned,  and  18  directors 
were  elected  in  their  places.  Of  these  18  directors,  10  were  largely 
interested  in  the  four  companies  merged ;  3  others  had  been  connected 
with  such  concerns  or  individuals  as  counsel;  4  represented  either 
the  bankers  (J.  P.  Morgan  &  Co.),  or  capitalists  associated  with 
them;  the  only  remaining  director  was  put  in  to  comply  with  the 
corporation  laws  of  New  Jersey  requiring  a  resident  director. 

On  the  same  day  also  the  temporary  officers  of  the  company  re- 
signed and  the  principal  officers  elected  in  their  places  were  as  fol- 
lows: Cyrus  H.  McCormick,  president;  James  Deering,  Harold  F. 
McCormick,  AV.  H.  Jones,  and  J.  J.  Glessner,  vice  presidents;  Rich- 
ard F.  Howe,  secretary  and  treasurer.  The  executive  committee,  of 
which  Charles  Deering  was  made  chairman,  included  the  principal 
representatives  of  four  of  the  companies  merged,  and  G.  W.  Perkins, 
who  was  also  made  chairman  of  the  finance  committee. 

An  important  step  in  carrj^ing  out  the  original  contracts  of  July  28, 
1902,  with  the  principal  companies  entering  the  merger,  namely,  the 
establishment  of  a  voting  trust,  was  made  on  August  13  by  execution 
of  the  voting  trust  agreement  and  the  appointment  of  the  following 
persons  as  voting  trustees,  namely,  George  W.  Perkins^  Charles 
Deering,  and  Cyrus  H.  McCormick. 

The  actual  consummation  of  the  merger,  as  explained  in  more  de- 
tail in  the  full  text  of  the  report,  involved  certain  additional  con- 
tracts. This  was  due  to  the  fact  that  since  the  contracts  of  August 
11,  1902,  limited  the  total  issue  of  capital  stock  to  $120,000,000, 
and  since  $60,000,000  of  this  was  to  be  issued  for  working  capital, 
there  would  have  been  nothing  left  for  the  bankers  and  promoters 
or  for  the  purchase  of  the  Milwaukee  Harvester  Co.  in  case  the 
appraisal  of  the  physical  properties  of  the  four  vendor  companies 
amounted  to  as  much  as  $60,000,000.  The  contemplated  compensa- 
tion of  the  bankers  was  $3,000,000  in  stock,  and  the  cost  of  the  Mil- 
waukee company  (put  in  by  the  bankers),  together  with  certain  ex- 
penses, amounted  to  more  than  $3,500,000.  If  these  items  were  to 
be  provided  for,  therefore,  there  would  be  only  about  $53,500,000  of 
stock  left  to  pay  for  the  plants  and  other  physical  properties  of  the 
four  vendor  companies.  It  was  agreed,  therefore,  by  an  addi- 
tional contract  dated  August  17,  1903,  that  certain  specified  amounts 

79958—13 2 


I 


8  REPORT  ON   THE  INTERNATIONAL  HARVESTER  CO. 

of  stock  should  be  allotted  to  each  of  the  vendor  companies  in  lieu  of 
the  amounts  to  be  determined  by  the  appraisals.  The  amounts 
agreed  upon,  subject  to  slight  adjustments,  were  as  follows: 

McCormick   company $26, 321, 656. 86 

Deering  company 21, 362,  554. 64 

Champion  company 3.372,185.91 

Piano  company 2,193,603.09 

Total 53.  250. 000. 50 

It  will  be  seen,  therefore,  that  the  elaborate  appraisals  made  of  the 
physical  properties  of  the  vendor  companies  really  did  not  determine 
the  amounts  of  stock  issued.  Subsequently,  however,  these  ap- 
praisals, when  completed,  were  used  to  some  extent  for  bookkeeping 
purposes.  The  final  allotment  of  the  $120,000,000  capital  stock  of  the 
International  Harvester  Co.  is  briefly  summarized  in  the  following 
table : 

DISPOSITION   OF  ORIGINAL   1120,000.000   CAPITAL   STOCK  OF   INTERNATIONAL 

HARVESTER    CO. 

Plant    stock, 

J.  P.  Morgan  &  Co. : 

Commission %X  000,  000.  00 

Less  contribution  to  Champion  and 

Piano  companies 42,  857.  14 

2,  057, 142.  96 
Milwaukee  Han'ester  Co 3,  000,  000.  00 

$5,  957, 142.  86 

McCormick  Interests : 

Original    allotment 26.  321.  656.  86 

Less  contribution   to  Champion  and 

Piano   companies 59, 142.  86 

26,  262,  514.  00 

Deerlns;  Interests : 

Original    allotment 21,  362,  554.  64 

Less  contribution  to  Champion  and 

Piano   companies 48,  000.  00 

21,  314,  554.  64 

piano  interests  : 

Original    allotment 2,  193,  603.  09 

Plus    contributions    from    other   in- 
terests     75,000.00 

2,  268,  603.  09 

Champion  interests : 

Original    allotment 3,  372, 185.  91 

Plus    contributions    from    other    in- 
terests     75,000.00 

3,  447, 186.  91 

Organization    expenses    (excluding    Mil- 
waukee   company    and    incorporators' 

stock)  : 

Sold    611,803.34 

On  hand 138,  196. 16 

749,  999.  50 

$60,  000,  000.  00 


SUMMABY.  StU^^^^^        t    \'-'^         ?. 

Cash  stock.  ^    ^^WlJ^  ^        ,                  rM 

J.  p.  Morgan  &  Co. :  ^^        ^^^.w    '^     ^.  > 

Cash $9,940,000.00  v\  ^"^     \\ 

Incorporators 60,000.00  .■  cXS^      ^    \^^       «^^ 

Milwaukee  excess 148, 190. 66  ,A>^^'    ^^"^     \\^^^ 

$10.  148, 196.  66  v%\«^        ,  ,,t>^ 

McCormick  interests:  V^^   \»j  ^ 

Original  subscription 20,  000,  000.  00  W^         ^«i 

Subsequent  subscription 4,  886,  190.  13 

— ; 24,  886, 190.  13 

Deering  interests : 

Original  subscription 16,  000,  000.  00 

Subsequent  subscription 3,  965,  013.  21 

19,965,613.21 

Piano  interests 4,  000,  OOO.  00 

Champion  interests 1,  ooo,  000.  00 

$60,  000,  000.  00 

The  table  is  in  the  main  explained  by  the  preceding  discussion.  It 
will  be  noticed  that  certain  small  amounts  were  deducted  from  the 
"plant  stock"  issued  to  the  bankers  and  to  the  McCormick  and 
Deering  interests,  together  aggregating  $150,000,  this  amount  being 
divided  equally  between  the  Champion  and  Piano  interests.  Again, 
while  $3,000,000  of  stock  was  allotted  for  the  acquisition  of  the 
Milwaukee  Harvester  Co.,  on  actual  appraisal  the  value  was  estab- 
lished at  $3,148,196.66.  The  excess  was  issued  to  the  bankers  out  of 
the  cash  stock.  The  banking  interests  also  raised  $10,000,000  of 
cash  capital  (including  $60,000  paid  in  by  the  temporary  incor- 
porators). The  remaining  cash  capital  was  raised  by  the  various 
manufacturing  interests  as  indicated  in  the  table. 

Of  the  $120,000,000  capital  stock  of  the  company,  $103,144,660.98, 
or  86  per  cent,  was  received  by  the  McCormick,  Deering,  Champion, 
and  Piano  interests.  The  McCormick  interests  alone  received  $61,- 
148,704.13,  or  42.6  per  cent,  and  the  Deering  interests  $41,280,167.85, 
or  34.4  per  cent.  These  two  groups  together,  therefore,  received  no 
less  than  77  per  cent  of  the  total  capital  stock.  As  a  matter  of  fact, 
while  the  voting  trust  technically  gave  the  McCormick,  Deering,  and 
Morgan  interests  equal  voice  in  the  management  of  the  company, 
the  predominating  influence  appears  to  have  been  with  the  McCor- 
mick interests. 

POSITION  OF  THE  INTERNATIONAL  HARVESTER  CO.  AT  ITS 

ORGANIZATION. 

At  its  organization  the  International  Harvester  Co.  controlled 
approximately  85  per  cent  of  the  total  production  of  harvesting 
machines  in  the  United  States.  While  exact  data  on  production  are 
not  available,  statistics  of  sales  show  that  in  binders  the  companies 
composing  the  new  combination  had  handled  approximately  90  per 
cent  of  the  business  in  the  year  prior  to  the  merger;  in  mowers,  about 


iBi 


10 


REPORT  ON   THE  INTERNATIONAL  HARVESTER  CO. 


81  per  cent ;  and  in  rakes,  about  67  per  cent.    This  is  shown  by  the 
following  comparison  of  sales  in  the  1902  season : 


Binders 
Mowers 
Rakes.. 


Sold  by  International 

Harvester  Co. 

companies, 

season  of  1902.1 


Number. 
180.024 
297,880 
165,219 


Percent. 
90.9 
81.2 
67.0 


Sold  by  independent 
OMnpanies, 
of  1902.« 


Number. 
18,128 
68,890 
>81,37S 


Per  cinU 
9.1 
18.8 
33.0 


»  Number  produced  in  case  of  the  Milwaulcee  company. 
>  Number  produced  in  case  of  the  Osborne  company. 
*  Number  for  independents  partly  estimated. 

The  important  machines  were  binders  and  mowers,  and  combining 
these  it  may  be  safely  said  that  85  per  cent  of  the  business  was  handled 
by  the  new  consolidation  at  its  organization. 

The  McCormick  company  had  much  the  largest  production  for  each 
class  of  harvesting  machines;  the  Deering  company  was  second  in 
each  case.  The  Champion  concern  stood  third  with  respect  to  binders 
and  mowers,  while  the  Milwaukee  had  the  smallest  output  for  all  the 
principal  machines. 

COMPABISON  OF  CAPITALIZATION  WITH  INVESTMENT. 

As  already  shown,  of  the  capital  stock  of  $120,000,000  at  the  time 
of  organization,  $60,000,000  was  issued  for  plants,  inventories,  and 
similar  property,  and  $60,000,000  for  working  capital.  The  appraised 
value  of  the  property  acquired  by  the  $60,000,000  of  "  plant  stock," 
so  called,  was  $67,000,000,  exclusive  of  good  will,  and  the  company 
claims  therefore  that  it  started  with  a  surplu.s  of  $7,000,000.  This 
surplus  was  later  written  off.  As  a  matter  of  fact,  this  appraisal  of 
$67,000,000  for  the  property  acquired  by  the  plant  stock  was  in  excess 
of  a  fair  valuation,  exclusive  of  good  will.  As  shown  below,  the 
Bureau  has  arrived  at  a  valuation  for  this  property  of  only  about 
$49,100,000.  The  difference  between  this  and  the  $60,000,000  of  stock 
issued  therefor,  so  far  as  covered  by  any  value  whatever,  must  be  set 
against  good  will. 

VALUE  OF  PHYSICAL  PROPERTIES  AND  INVENTORIES. 

In  the  first  instance,  it  should  be  noted  that  the  Bureau  experienced 
great  difficulty  in  arriving  at  a  satisfactory  valuation  of  the  property 
acquired  by  the  company.  The  company  has  repeatedly  asserted  that 
it  did  not  have  the  original  books  or  records  of  the  constitutent  com- 
panies, and  the  representatives  of  some  of  those  companies,  moreover, 
persistently  refused  or  evaded  compliance  with  the  Bureau's  request 
that  they  produce  them.  Moreover,  the  available  records  were  in 
unsatisfactory  shape.  No  such  records  were  secured  for  the  Cham- 
juon  and  Piano  concerns.    For  the  McCormick,  Deerincc  and  Milwau- 


SUMMARY. 


11 


kee  companies,  however,  certain  data  taken  from  the  books  or 
submitted  to  the  bankers  were  obtained,  and  since  the  property 
acquired  from  these  three  companies  together  comprised  90  per  cent 
of  the  total  appraised  value  of  the  plants  and  inventories  the  data 
secured  covering  them  enabled  the  Bureau  to  arrive  at  a  fairly  close 
determination  of  the  total  value  of  this  class  of  property. 

The  results  of  the  Bureau's  analysis  for  the  McCormick  and  Deer- 
ing concerns  are  compared  with  the  old  book  values  and  with  tho 
values  adopted  by  the  International  Harvester  Co.  in  the  following 
table : 

Mccormick  harvesting  machine  co.  :  valuations  of  physical  proper- 
ties, 1902. 


Factory  real  estate 

Factory  buildings  and  machinery . 

Agency  property 

Illinois  Northern  Ry 

Timber 

Miscellaneous 

Inventory 


Book. 


$1,341,149.12 
5,845,858.10 
1,176,306.11 

0) 
314,950.65 

620,764.23 
2  10,562,793.59 


Total ..      19,761,821.80 


Harvester  Co. 


$4,993,909.00 

7,401,692.92 

1,571,905.85 

2,553,944.31 

314.363.86 

886.842.39 

11,738,822.70 


29,461,481.03 


Bureau. 


$3,772,032.80 

6,895,942.99 

1,549,557.71 

485,264.71 

314. 363. 86 

655,150.80 

9, 818. 476.  &4 


23,490,789.41 


DEERINO  HARVESTER  CO.:  VALUATIONS  OF  PHYSICAL  PROPERTIES,  1902. 


Factory  real  estate 

Factory  buildings  and  machinery. 

Agency  property 

Ore,  coal,  iron,  and  steel 

Timber 

Miscellaneous 

Inventory 

Total 


$670,642.45 

2,579,231.38 

226,495.26 

•  1,589,093.31 

275,567.88 

« 356, 773. 01 

6  8,060,598.58 


$1,563,165.63 
5,523,041.88 

471,898.94 
9,511,400.44 
1,560,436.36 

546,511.66 
8,905,059.78 


13,758,401.87       28,081,514.69 


$1,260,775.86 

5,070.274.73 

417,904.31 

1,795,588.57 

525, 189. 12 

515,706.32 

7,271,265.98 


16,856,704.89 


I  Leasehold  and  equipment  not  separately  booked  by  McCormick  Co.;  equipment  included  apparently 
In  item  of  factory  buildings  and  machinery  (appraised  at  $53,944.31). 

*  Includes  on  hand  freight  and  duty  ($231,504.15)  as  shown  by  appraisal;  not  shown  in  McCormick  bal- 
ance sheet. 

» Without  deduction  of  purchase-money  obligations  of  $916,753.40,  which  are  deducted  in  the  EUirvester 
Co.  and  Bureau  valuations. 

Not  including  Mann  property,  appraised  at  $28,414.89  and  at  $34,532.68,  respectively. 
Includes  $240,590.18  on  band  freight  and  duty,  not  shown  in  Deering  data. 

In  explanation  of  these  tables  it  should  be  stated  that  for  most 
of  the  property  of  the  two  chief  vendor  companies  the  organizers  of 
the  International  Harvester  Co.  had  two  appraisals  made.  Almost 
invariably  the  higher  of  these  appraisals  was  selected  by  the  Inter- 
national Harvester  Co.  in  making  up  its  valuations.  This  fact  alone 
is  strongly  suggestive  of  a  tendency  to  overvalue.  In  most  cases 
even  the  lower  appraisals  were  decidedly  higher  than  the  old  book 
valuations.    Representatives   of   the    International   Harvester   Co., 


•^m 


IS 


BEPOBT  ON  THE  INTEBNATIONAL  HABVESTEB  CO. 


SUMMARY. 


13 


however,  have  insisted  that  the  entries  on  the  books  of  the  prede- 
cessor companies  were  not  a  reliable  indication  of  the  true  values 
of  the  property  in  1902.  While  in  the  opinion  of  the  Bureau  these 
book  valuations  certainly  appear  in  some  cases  to  be  a  far  better 
indication  of  the  real  value  of  the  property  than  are  the  values 
adopted  by  the  Harvester  Co.  itself,  nevertheless,  in  view  of  the 
element  of  doubt,  the  Bureau  as  a  rule  did  not  use  these  book  valua- 
tions, but  instead  established  valuations  according  to  its  best  judg- 
ment  in  the  light  of  all  available  data  and  after  full  consultation  with 
the  Harvester  Co.  representatives.  In  some  cases  the  Bureau  adopted 
the  lower  appraisals,  while  for  the  Champion  and  Piano  companies 
all  the  properties  except  the  inventories  have  been  put  in  at  the 
appraised  values  adopted  by  the  International  Harvester  Co.  In 
some  cases  collateral  evidence  sustained  the  book  valuations. 

The  most  striking  differences  between  the  valuations  adopted  by 
the  Bureau  and  those  adopted  by  the  International  Harvester  Co. 
occur  in  the  ore  and  timber  properties  of  the  Deering  interests,  in  the 
factory  real  estate  and  in  the  industrial  r«iilroad  of  the  McCormick 
interests,  and  in  the  inventories  of  materials  and  products  for  all 
companies  combined. 

Deering  ore  properties. — The  Deerings  purchased  about  January, 
1902,  or  about  seven  months  before  the  merger,  two  ore  leaseholds  on 
the  Mesabi  range,  the  Hawkins  and  the  Agnew,  for  $525,000  and 
$150,000,  respectively.  Of  the  purchase  price  of  the  Hawkins,  $350,- 
000  was  in  notes,  making  the  net  investment  value  at  the  time  of 
purchase  only  $175,000.  The  Deerings  expended  $46,996.57  on  this 
property  for  development,  etc.  It  was  valued  for  purposes  of  consoli- 
dation, after  deduction  of  indebtedness,  at  $5,770,000.  In  the  case 
of  the  Agnew  the  entire  purchase  price,  $150,000,  was  in  notes. 
The  Deerings  had  expended  $54,284.18  for  improvements,  etc.  It 
was  valued,  after  deduction  of  indebtedness,  at  $2,193,750.  In 
both  cases  the  notes  were  still  outstanding  at  the  time  of  transfer 
to  the  International  Harvester  Co.  and  were  assumed  by  it. 

In  the  case  of  leasehold  ore  property  the  current  value  of  the  equity 
is  ordinarily  expressed  by  the  bonus;  that  is,  the  price  at  which  the 
leasehold  is  or  can  be  transferred.  The  bonus  value  in  the  case  of  the 
Hawkins  mine  was  about  4  to  6  cents  per  ton  of  the  estimated  deposit, 
and  in  the  case  of  the  Agnew  mine  about  3  to  4  cents.  The  Bureau  in 
this  investigation  and  that  of  the  steel  industry  found  that  the  aver- 
age rate  of  bonus  on  ten  Mesabi  leasehold  mines,  including  the  Haw- 
kins and  Agnew,  which  were  transferred  during  1902,  was  approxi- 
mately 3J  cents.  The  valuations  assigned  the  equity  in  these  mines 
by  the  International  Harvester  Co.,  however,  amounted  to  42J  cents 
for  the  Hawkins  per  ton  of  ore  in  the  ground  and  37^  cents  for 
the  Agnew,  or  several  times  the  respective  bonuses  actually  paid. 


These  were  absurdly  high  valuations.  The  Bureau  is  satisfied  that 
there  were  no  unusual  conditions  surrounding  the  purchase  of  the 
Hawkins  and  Agnew  mines  which  indicated  that  the  value  of  these 
leaseholds  was  exceptional.  Kepresentatives  of  the  International 
Harvester  Co.  claimed,  however,  that  there  had  been  some  increase 
in  the  estimated  tonnage  of  the  deposit  during  the  interval  that  the 
Deerings  had  held  the  property.  While  the  Bureau  is  disposed  to 
regard  the  price  paid  by  the  Deerings  as  fairly  expressing  the  value 
in  August,  1902,  it  arbitrarily  added  $500,000  to  that  price  to  make 
certain  not  to  undervalue  this  ore.  Adding  thereto  the  cost  of  im- 
provements, etc.,  made  in  the  interim,  and  deducting,  as  in  the  ap- 
praisal, the  purchase-money  obligations,  gives  a  net  value  of  $776,- 
280.75  instead  of  the  appraised  value  of  $7,963,750.  It  is  undoubt- 
edly true  that  these  leaseholds  are  to-day  worth  much  more  than  this 
sum,  but  this  obviously  has  nothing  to  do  with  their  value  in  1902. 

It  is  important  to  consider  that  the  bankers  who  dominated  the 
organization  of  the  International  Harvester  Co.,  also  organized  the 
United  States  Steel  Corporation,  officers  of  which  had  only  a  few 
weeks  before  in  important  litigation  then  pending  against  that  com- 
pany submitted  affidavits  to  the  effect  that  the  value  of  its  ore,  tak- 
ing leaseholds  and  fee  indiscriminately,  was  $700,000,000,  or  ap- 
proximately $1  per  ton.  Mr.  Perkins,  to  whom  was  left  the  appraisal 
of  these  ore  properties  and  who  was  also  chairman  of  the  finance 
committee  of  the  Steel  Corporation,  was  therefore  in  no  position 
to  deny  an  excessive  valuation  for  this  Deering  ore.  The  valuation 
placed  on  this  Deering  ore  was  vigorously  opposed  by  the  McCor- 
mick interests,  and  a  final  book  value  was  reached  only  after  several 
years  of  controversy,  and  after  the  distribution  of  the  company's 
stock  had  been  decided  upon. 

Deering  timber  properties. — ^In  the  case  of  the  Deering  timber 
properties,  there  was  likewise  a  very  great  overvaluation.  The  most 
important  of  these  properties,  namely,  that  in  Missouri,  was  acquired 
by  the  Deering  interests  mostly  in  1899,  at  a  total  cost  of  approxi- 
mately $250,000,  which  was  the  value  entered  on  their  books.  This 
was  transferred  to  the  books  of  the  Harvester  Co.  at  about  $1,535,000. 
This  valuation,  however,  was  not  established  before  1905,  and  then 
only  by  a  single  appraiser,  who  was  largely  interested  in  the  timber 
business.  The  valuation  was  admitted  by  a  representative  of  the 
Harvester  company  to  be  excessive.  The  timber  was  almost  entirely 
hardwoods.  Information  obtained  by  the  Bureau  in  the  course  of 
its  investigation  of  the  lumber  industry  indicated  that  for  hard- 
woods in  this  particular  locality  the  advance  in  value  during  the 
three-year  period  from  1899  to  1902  (that  is,  during  the  period  that 
this  timber  was  held  by  the  Deering  interests)  would  on  the  average 


11 


REPORT  ON  THE  INTERNATIONAL  HARVESTER  CO. 


be  less  than  50  per  cent.    In  order  to  be  liberal,  however,  the  Bureau 

Of  $000,000     This,  It  will  be  seen,  is  about  $1,035,000  less  than  the 
valuation  claimed  by  the  International  Harvester  Co 
f^^f^^r^""  "^^''  ^^'^"=— In  the  case  of  the  factorv  real  estate 

II  <?oo!  oS""T^  T?'"'^'  *'*'  ^'^^'''  "PP^'^'^-J  fi^^d  the  value 
at  !fc4,a»4,000,  while  the  lower  appraisal  fixed  it  at  $2,550,000     This 

iT'ii'Z '^"^u^  °"  ^^^  ^^  °^  **"'  McCormick  concern  at  only 
$1,341000  There  was  a  considerable  division  of  opinion  among 
experts  called  in  to  value  this  property,  and  a  representative  of  the 
accountants  who  had  charge  of  these  appraisals,  now  an  official  of 
the  Harvester  company,  while  of  the  opinion  that  a  majority  had 
favored  the  higher  appraisal  was  not  altogether  clear  on  this  point. 
Furthermore,  he  stated  that  "inasmuch  as  the  capitalization  in- 
cluded no  good  will,  we  concluded  that  there  could  be  no  question 
about  our  adopting  the  higher  valuation  if  the  directors  so  decided  " 
This  reference  to  good  will  clearly  indicates  that  the  higher  ap- 
praisal was  excessive.  The  Bureau  regards  it  as  possible  that  the 
lower  appraisal  was  a  full  valuation,  but  as  there  was  some  doubt  on 

*, -^S  '*  ""°''*'^  *•**  ''''^™*^^  °*  *he  two  appraisal  values,  or 
Tpioj  i  72,000. 

ILJ.INOIS  Northern  Railway  (McCoRMiCK).-The  book  valuation 
of  the  franchise  of  this  company,  according  to  the  balance  sheet  for 
the  year  1903,  was  only  $431,000,  and  its  equipment  was  appraised  at 
$54,000,   which   together   make   ^85,000.     The   International   Har- 
vester Co.  adopted  a  valuation  of  $2,554,000,  of  which  $2,500,000  was 
for  the  franchise  alone.     It  relied  for  this  valuation  largely  on  a 
statement  by  J.  E.  Gorman,  at  that  time  general  freight  agent  of  the 
Santa  Fe.     His  valuation,  however,  was  almost  entirely  based  upon 
the  earning  capacity  of  the  road,  and,  furthermore,  upon  freicrht 
divisions  which  were  grossly  exorbitant,  and  which   were  shortly 
afterwards    (1904)    condemned   by  the  Interstate  Commerce  Com- 
mission and  reduced  from  $12  a  car  to  $3.50  a  car,  in  accordance 
with  Its  ruling.    Mr.  Gorman  specifically  stated  that  the  road  would 
not  be  worth  anywhere  near  his  valuation  if  it  were  owned  merely 
by  an  ordinary  railroad  company  like  the  Santa  Fe.    The  evidence 
of  overvaluation  in  this  case  was  conclusive,  and  the  Bureau  simply 
allowed  the  value  of  $485,000  shown  above. 

lNVENT0RiE8.-The  inventories  of  the  five  combining  companies 
were  valued  on  the  International  Harvester  Co.'s  books  at  $25,548,000. 
This  was  admittedly  a  high  valuation.  Under  the  contracts  of  mer- 
ger  raw  materials  were  to  be  taken  over  at  market  value  instead  of 
at  cost,  and  on  September  30,  1902,  market  values  were  generalh 
high,  and  for  iron  and  steel  products  exceptionally  so.  These  ap- 
praisal inventories  were  made  in  great  detail,  and  included  consid- 


SUMMARY. 


15 


erable  miscellaneous  property  not  ordinarily  considered  in  inventory 
taking.     No  allowance  was  made  for  depreciation  of  finished  ma- 
chines nor  for  old  models  carried  over.    The  overvaluation  of  these 
inventories  is,  moreover,  conclusively  proved  bv  the  fact  that  the 
International  Harvester  Co.  itself  in  1904,  when  making  up  its  ac- 
counts for  1903,  wrote  them  down  from  $25,548,000  to  $18,155,000, 
on  the  specific  ground  that  they  were  entered  too  high  for  "  trading 
purposes."    The  company,  however,  claims  that  the  higher  valuation 
of  $25,548,000  should  be  allowed  by  the  Bureau  in  computing  the 
assets,  although  the  company  itself  wrote  off  most  of  the  redu'ction 
from  its  surplus.     The  Bureau's  position  is,  especially  as  the  com- 
pany was  a  merger  of  going  concerns,  that  a  valuation  which  is 
proper  for  trading  purposes  is  also  proper  for  purposes  of  reckoning 
assets.     However,  the  Bureau,  after  extended  consideration  of  the 
company's  contentions  on  this  point,  is  satisfied  that  the  reduction 
of  these  inventories  to  $18,155,000  was  unduly  severe,  and  apparently 
was  made  because  otherwise  the  company's  accounts  for  1903  would 
have  shown  a  loss,  although  this  is  flatly  denied  by  the  company's 
representatives.     The  real  values,  as  nearly  as  could  be  established  by 
the   Bureau   from   the   rather  confused   records,   aggregated   about 
$22,730,000.     In  these  book  valuations,  however,  no  deduction  had 
been  made  for  depreciation  of  finished  machines,  which,  under  the 
condition  of  the  trade  at  that  time,  apparently  was  considerable. 
The  Bureau  made  an  arbitrary  allowance  of  $1,500,000  for  deprecia- 
tion, thus  leaving  the  net  value  of  these  inventories  at  $21,230,000. 

These  and  various  other  adjustments  made  by  the  Bureau  in  certain 
items  are  fully  discussed  in  the  text. 

The  net  result  of  the  Bureau's  readjustment  of  the  valuations  was 
to  give  a  total  of  $49,117,356.08  as  the  maximum  valuation  of  the 
physical  property  and  inventories  acquired  by  the  International 
Harvester  Co.  from  the  five  companies  forming  the  combination,  as 
follows : 

FIVE  PREDECESSOR  COMPANIES:  VALUATIONS  OF  PHYSICAL  PROPERTIES,  1902. 

|N.  B.— No  book  values  available  for  Champion  and  Piano,  therefore  total  book  valuations  can  not  be 

given.] 


Factory  real  estate,  buildings,  and  machinery. 

Agency  property 

Railroads 

Ore,  coal,  iron,  and  steel 

Timber 

Mifloellaneous ' 

Inventories 


Total. 


Harvester  Co. 


$23,270,218.14 
2,249,882.33 
2,579,324.82 
9,574,138.79 
1,874,800.22 
1,979,702.93 

25,548,162.42 


Bureau. 


67,076,229.65 


$20,787,435.09 

2,173,539.56 

510,645.22 

1,858,326.92 

839,552.98 

1,717,206.00 

21,230,650.31 


Difloroice. 

$2,482,783.05 
76,342.77 
2,068,679.60 
7,715,811.87 
1,035,247.24 
262,496.93 
4,317,512.11 


49,117,356.08        17,958,873.57 


>  Par  MOwankee  company  includes  net  working  capital  after  deducting  $148,196.66  for  plant  stock  excess. 


TTa- 


-  -A 


16 


REPORT  ON   THE  INTERNATIONAL  HARVESTER  CO. 


SUMMARY. 


The  Bureau  believes  that  while  this  valuation  might  be  somewhat 
reduced  if  all  the  facts  were  available,  any  adjustment  which  would 
be  made  would  not  be  of  decisive  importance.  This  maximum  valu- 
ation of  $49,100,000  compares  with  $60,000,000  "  Plant  stock  "  issued 
for  such  property  and  for  promoters'  expenses  and  services.  This, 
as  already  noted,  leaves  a  difference  of,  roughly,  $10,900,000  to  be 
represented  by  intangible  considerations,  such  as  good  will. 

GOOD   WILL. 

The  Bureau  has  not  attempted  to  value  any  good  will  which  the 
constituent  concerns  of  the  consolidation  may  have  brought  into  the 
merger.  In  the  original  contracts  on  whidi  the  combination  was 
based  it  was  agreed  that  good  will  should  be  valued  at  the  sum  of  the 
profits  of  the  two  preceding  years  plus  an  additional  10  per  cent.  By 
this  method  of  valuing  good  will,  which  was  more  or  less  commonly 
used  among  manufacturers,  the  total  value  of  the  good  will  was 
placed  at  about  $20,800,000.  If  good  will  be  allowed  for  the  Mil- 
waukee company  on  the  same  basis,  the  total  good  will  of  the  combi- 
nation would  be  about  $21,300,000. 

Without  indorsing  this  valuation,  the  Bureau  is  nevertheless  of  the 
opinion  that  there  was  a  substantial  good-will  value  brought  into 
the  merger.  The  McCormick,  Deering,  and  Milwaukee  companies, 
as  already  shown,  made  a  liberal  rate  of  profit  while  operating  inde- 
pendently. This  fact,  together  with  the  fact  that  their  business  had 
been  long  established,  and  that  their  machines  were  always  sold  under 
brand  name,  indicates  that  these  concerns  must  have  had  a  large  good 
will.  Against  this  there  should  be  set  the  fact  that  the  harvesting- 
machine  business  had  apparently  been  somewhat  overdone  prior  to 
the  merger,  and  that  there  was  some  danger  of  a  loss  of  good  will  as 
the  very  result  of  the  formation  of  a  combination  or  trust  like  thie 
International  Harvester  Co. 

WORKING  CAPITAL. 

The  stock  issued  for  working  capital,  so  far  as  the  vendor  compa- 
nies are  concerned,  was  paid  in  chiefly  through  the  collection  of  bills 
I'-eceivable  of  the  principal  constituent  companies.  About  $10,000,000 
of  this  cash  stock  was  subscribed  for  at  par  by  the  bankers.  The 
Bureau  made  an  extended  investigation  of  the  accounts  relating  to 
this  provision  of  working  capital,  and  so  far  as  these  may  be  relied 
upon  they  indicate  that  the  full  amount  of  $60,000,000  was  actually 
paid  in  in  cash.  Representatives  of  the  International  Harvester  Co., 
moreover,  repeatedly  declared  that  there  was  no  deduction  or  allow- 
ance from  this  cash  payment,  but  that  the  full  amount  was  actually 
paid  in  as  represented. 


Statistical  ^-^W 
Kent    tmfl 


avj  y 


SUBSEQUENT  ACQUISITIONS  AND  EXTENSIONB^  bi^  V  niversitf^ 

Immediately  after  its  organization  and  almost  continuously  there- 
after the  International  Harvester  Co.  pursued  the  policy  of  ex- 
panding its  control  over  the  farm-machinery  business,  not  only  in 
harvesting  machines  but  also  in  various  other  branches.  This 
process  may  be  divided  into  three  parts:  (1)  Acquisition  of  compet- 
itors in  the  harvesting-machine  business;  (2)  acquisition  of  con- 
cerns making  other  lines  of  farm  machinery;  and  (3)  construction  of 
new  plants  in  the  United  States  and  in  various  foreign  countries 
for  the  manufacture  of  harvesting  machines  and  other  farm  ma- 
chinery. 

Shortly  after  its  organization,  namely,  in  January,  1903,  it  ac- 
quired secret  control  of  D.  M.  Osborne  &  Co.,  of  Auburn,  N.  Y.,  the 
most  important  manufacturer  of  harvesting  machines  not  originally 
taken  into  the  combination.  This  secret  control  was  maintained  for 
nearly  two  years.  During  this  period  the  Osborne  company  was 
operated  and  advertised  as  an  independent  concern,  and  these  rep- 
resentations were  supported  by  its  managers  in  sworn  statements  that 
it  was  an  independent  company.  The  International  Harvester  Co. 
claims  that  this  was  done  to  enable  the  original  owners  to  collect  cer- 
tain obligations  due  them  and  that  it  was  done  at  their  request. 
While  the  Osborne  company  had  a  valuable  line  of  tillage  imple- 
ments, its  chief  importance  lay  in  the  production  of  harvesting  ma- 
chines, in  which  it  had  an  extensive  foreign  trade.  In  selling  this 
concern  the  two  largest  active  stockholders  of  the  Osborne  company 
(T.  M.  Osborne  and  Edwin  D.  Metcalf)  covenanted  with  the  Inter- 
national Harvester  Co.  that  they  would  refrain  from  engaging  inde- 
pendently in  the  same  business  for  a  period  of  ten  years. 

In  a  similar  secret  way  the  International  Harvester  Co.,  between 
1903  and  1904,  acquired  control  of  several  other  concerns  which  com- 
peted in  the  manufacture  of  harvesting  machines  and  twine,  namely, 
the  Minnie  Harvester  Co.,  of  St.  Paul,  Minn,  (harvesting  machines) ; 
the  Aultman-Miller  Co.,  of  Akron,  Ohio  (harvesting  machines 
and  twine) ;  and  the  Keystone  Co.,  of  Sterling,  111.  (harvesting 
machines  and  hay  tools),  and  operated  them  without  disclosing  such 
control  for  various  periods.  In  the  case  of  the  Minnie  Harvester  Co. 
it  is  claimed  that  this  method  was  used  merely  to  facilitate  the  liqui- 
dation of  the  company. 

Negotiations  were  also  had  with  a  number  of  other  competing 
makers  of  harvesting  machines  with  a  view  to  acquiring  their  prop- 
erties or  business,  in  whole  or  in  part.  Among  these  were  the  Walter 
A.  Wood  Mowing  &  Reaping  Machine  Co.,  of  Hoosick  FaUs,  N.  Y. ; 
the  Acme  Harvester  Co.,  of  Peoria,  111.;  and  Massey-Harris  Ca 
(Ltd.),  of  Toronto,   Canada.    These  negotiations,  however,  were 


pfl 


18 


REPORT   ON   THE   INTERNATIONAL  HARVESTER  CO. 


SUMMARY. 


19 


not  consummated.  Massey-Harris  Co.  was  one  of  the  companies 
apparently  under  consideration  as  a  desirable  acquisition  at  the  time 
the  merger  was  being  arranged,  and  when  negotiations  for  its  pur- 
chase finally  fell  through  the  International  Harvester  Co.  proceeded 
to  enlarge  the  factory  already  begun  in  Canada. 

Several  other  concerns  were  apparently  offered  to  the  Interna- 
tional Harvester  Co.,  or  proposals  made  with  reference  to  their  ac- 
quisition by  that  company,  including  Adriance,  Piatt  &  Co.,  of 
Poughkeepsie,  N.  Y. ;  and  the  Johnston  Harvester  Co.,  of  Batavia, 
N.  Y.  These  negotiations  occurred  during  the  period  1903-1905,  but 
the  offers  or  proposals  were  ultimately  declined  by  the  International 
Harvester  Co.,  for  reasons  which  do  not  appear. 

EXTENSIONS  INTO  NEW  LINES. 

Aside  from  these  acquisitions  of  competing  concerns,  the  Interna- 
national  Harvester  Co.  has  greatly  expanded  its  business  by  branch- 
ing out  into  new  lines  of  manufacture  or  sale.  Among  the  most  im- 
portant lines  which  the  company  entered  in  this  way  were  manure 
spreaders,  wagons,  plows,  and  seeders.  Here  again  expansion  was 
accomplished  in  part  by  the  acquisition  of  concerns  already  organ- 
ized. In  1906  two  plants  for  the  manufacture  of  manure  spreaders, 
operated  by  the  J.  S.  Kemp  Manufacturing  Co.,  were  acquired,  one  at 
Newark  Valley,  N.  Y.,  and  the  other  at  Waterloo,  Iowa,  the  latter 
being  leased.  In  1904  the  company  acquired  the  Weber  Wagon  Co., 
and  in  the  same  year,  moreover,  entered  into  a  selling  arrangement 
with  the  Bettendorff  Axle  Co.,  of  Davenport,  Iowa,  for  the  sale  of  all 
its  output  of  steel  wagons.  Still  again,  about  1909,  the  company  en- 
tered into  a  contract  for  the  sale  of  the  plows  of  the  Parlin  &  Oren- 
dorff  Co.,  of  Canton,  111.,  in  Canadian  markets  only,  and  somewhat 
later,  it  made  a  similar  contract  with  the  Oliver  Chilled  Plow  Co., 
of  South  Bend,  Ind.,  for  the  sale  of  the  latter's  plows  in  Canada.  It 
also  acquired,  in  1910,  an  interest  in  this  company's  new  Canadian 
plow  works.  Very  recently— namely,  in  1912— the  international  Har- 
vester Co.  made  an  arrangement  for  the  distribution  and  sale  of  the 
entire  output  of  the  Richmond,  Ind.,  plant  of  the  American  Seeding 
Machine  Co.  At  a  much  earlier  date  the  International  Harvester 
Co.  had  considered  the  advisability  of  obtaining  a  large  stock  in- 
terest in  the  latter  company,  but  finally  decided  not  to  do  this  be- 
cause it  deemed  the  price  excessive. 

By  thus  extending  its  business  into  a  number  of  new  lines  the  In- 
ternational Harvester  Co.  not  only  increased  the  extent  of  its  busi- 
ness, but  where  it  was  thus  provided  with  satisfactory  goods,  it  was 
able  to  accomplish  their  sale  more  successfully  than  some  of  the 
former  owners,  partly  on  account  of  its  larger  financial  resources 
and  elaborate  selling  organization,  and  also  in  part  on  account  of 


the  pressure  it  was  able  to  exert  to  induce  dealers  to  handle  these  new 
lines.  To  a  considerable  extent  such  dealers  were  not  allowed  to 
handle  its  harvesting  machines  (in  which  it  had  obtained,  as  already 
shown,  a  substantially  monopolistic  position  by  means  of  combina- 
tion), unless  they  would  take  these  new  lines  also.  It  is  apparent, 
therefore,  that  not  only  did  the  company's  strong  position  in  the  har- 
vesting-machine business  facilitate  its  entrance  into  new  lines,  but 
also  that  these  new  lines  in  turn  afforded  a  further  means  of  main- 
taining its  position  in  the  harvesting-machine  business  itself. 

CX)N8TRUCT10N  OF  NEW  PLANTS. 

The  International  Harvester  Co.  extended  its  business  in  the  manu- 
facture of  harvesting  machines,  and  also  in  the  production  of  new 
lines  by  building  new  plants,  both  in  the  United  States  and  in 
foreign  countries.  Some  of  the  old  harvesting-machine  plants  were 
remodeled  and  used  for  making  new  lines  of  farm  machinery.  The 
most  important  new  plant  built  in  the  United  States  was  a  large 
tractor  plant  at  Chicago.  The  company,  furthermore,  greatly  en- 
larged its  plants  for  the  manufacture  of  iron  and  steel. 

The  most  important  new  construction  of  the  company  was  in  for- 
eign countries,  where  large  factories  have  been  built  for  the  manu- 
facture of  harvesting  machines  and  other  farm  machinery,  namely, 
in  Canada,  Sweden,  France,  Germany,  and  Russia. 

ORGANIZATION  OF  THE  INTERNATIONAL  HARVESTER  CO.  OF  AMERICA. 

One  important  feature  of  the  policy  of  the  combination  was  the 
use  of  the  Milwaukee  Harvester  Co.  as  a  selling  agency  for  the 
International  Harvester  Co.  of  New  Jersey.  For  this  purpose  the 
name  of  the  Milwaukee  company  was  changed  in  September,  1902,  to 
International  Harvester  Co.  of  America;  the  capital  stock,  fixed  at 
$1,000,000,  is  all  held  by  the  New  Jersey  company.  The  officers  and 
directors  of  the  America  company  were  until  1910  all  officers  or  direc- 
tors of  the  International  Harvester  Co.  ot  New  Jersey.  Apparently, 
a  separate  organization  was  adopted  in  order  to  avoid  heavy  taxa- 
tion and  the  delay  and  difficulty  of  procuring  new  licenses  to  do 
business  required  in  various  States.  Such  licenses  were  often  pro- 
hibited in  case  the  foreign  corporation  applying  was  a  trust  or  com- 
bination in  restraint  of  trade. 

REARRANGEMENT   OF   CAPITALIZATION. 

In  1907  the  International  Harvester  Co.  divided  its  capital  stock 
of  $120,000,000  into  $60,000,000  of  preferred  and  $60,000,000  of  com- 
mon stock.  Furthermore,  in  1910  a  stock  dividend  of  $20,000,000  of 
common  stock  was  declared  from  surplus,  making  the  capital 
stock  of  the  company  $140,000,000,  consisting  of  $60,000,000  pre- 
ferred and  $80,000,000  common.  In  this  connection  it  should  be  noted 
that  the  voting  trust  was  finally  dissolved  in  August,  1912,  and  the 


20 


REPORT  ON  THE  INTERNATIONAL  HARVESTER  CO. 


Stock  distributed  among  the  holders  of  the  stock  trust  certificates. 
The  great  bulk  of  the  stock  of  the  company  has  throughout  been 
closely  held  by  a  comparatively  few  interests,  who  have  also  been 
active  m  the  management  of  the  concern.  It  will  be  recalled  that 
ihe  McCormick  interests  had  approximately  43  per  cent  of  the 
stock  at  organization  and  the  Deerings  about  34  per  cent. 

On  January  29,  1913,  the  directors  of  the  International  Harvester 
Co.  announced  that  they  had  transferred  to  a  new  concern,  the 
International  Harvester  Corporation,  aU  of  the  foreign  plants  and 
all  of  the  foreign  business,  also  certain  domestic  plants  engaged  in 
the  manufacture  of  the  so-called  new  lines,  together  with  certain 
assets  pertaining  thereto.  This  company  is  capitalized  at  $70,000,000, 
consisting  of  $30,000,000  of  7  per  cent  preferred  stock  and  $40,000,000 
of  common  stock.  The  present  International  Harvester  Co.,  the 
name  of  which  it  is  proposed  shall  be  changed  to  International  Har- 
vester Company  of  New  Jersey,  will  retain  the  remaining  assets, 
and  Its  capital  stock  will  be  reduced  to  $70,000,000,  likewise  con- 
sistmg  of  $30,000,000  of  7  per  cent  preferred  and  $40,000,000  of 
common.  For  the  $70,000,000  stock  of  the  present  company  can- 
celed, the  stockholders  will  be  entitled  to  receive  cash  or  a  pro  rata 
distribution  of  the  stock  of  the  new  International  Harvester  Corpo- 
ration. This  action  by  the  company  is  admittedly  taken  in  view  of 
the  pending  dissolution  suit  of  the  United  States  Government 
agamst  the  company.  This  rearrangement  of  capitalization  was 
approved  by  the  stockholders  on  February  10,  1913.  If  intended  as 
part  of  a  plan  of  disintegration  the  Bureau  regards  this  method  of 
division  as  very  unsatisfactory. 

PRESENT  POSITION  OF  THE  INTERNATIONAL  HARVESTER  CO. 

The  original  monopolistic  position  of  the  International  Harvester 
Co.  in  harvesting-machine  lines  had  been  substantially  maintained 
up  to  the  close  of  1911,  as  the  following  table  shows; 

PROPORTION  OF   THE  HARVESTINO-MACmNE  BUSINESS  OF  THE  UNTTED  STATES 
CONTROLLED  BY  THE  INTERNATIONAL  HARVESTER  CO.  IN  mu 


Machines. 


Grain  binders. 

Mowers 

Rakes 


factured 

in  United 

Steteau 


Percent, 
87.0 

76.6 

72.0 


Sold  in 
United 
States. 


Percent. 
87.2 

74.6 
6&0 


» Percentages  based  on  practlflally  complete  returns  for  binders  and  mowers,  but  parUy  on  estimatea 
tor  rakes  lor  which  the  returns  covered  about  93  per  cant  of  the  total  business. 

For  the  new  lines  of  farm  machinery  it  is  not  possible  in  most  cases 
to  show  the  precise  position  of  the  International  Harvester  Co.,  but 


SUMMARY. 


21 


in  several  of  them  it  has  acquired  a  very  considerable  proportion  of 
the  trade.  For  spreaders  the  Bureau  has  obtained  statistics  covering 
a  large  majority  of  the  independent  production  and  sale  in  the 
United  States,  and  has  made  estimates  for  the  remainder  which  it  is 
satisfied  are  approximately  correct.  A  comparison  of  these  figures 
with  those  of  the  International  Harvester  Co.  shows  that  the  company 
has  about  55  per  cent  of  the  1911  production  in  the  United  States 
and  about  50  per  cent  of  the  sales.  A  comparison  for  disk  harrows 
on  a  similar  basis,  for  which  the  Bureau  also  had  returns  for  a 
substantial  majority  of  the  total  independent  business,  indicates  that 
the  Harvester  Co.'s  proportion  of  the  number  produced  was  at  least 
43  per  cent,  and  its  proportion  of  the  number  sold  at  least  37  per  cent. 
For  certain  other  lines  also  the  International  Harvester  Co.  has  ac- 
quired a  large  proportion  of  the  business,  but  satisfactory  data  are 
not  available  to  show  its  percentage.  In  the  case  of  wagons,  the 
International  Harvester  Co.  had  nothing  at  the  start,  but  according 
to  the  best  estimates  that  can  be  made  by  the  Bureau,  had  in  1911 
about  15  per  cent  of  the  number  manufactured  in  the  United  States 
and  about  13  per  cent  of  the  number  sold,  although  the  total  produc- 
tion of  farm  wagons  in  the  United  States  has  decreased  in  recent 
years. 

It  is  apparent,  therefore,  that  the  International  Harvester  Co.  not 
only  has  maintained  a  high  degree  of  monopoly  in  the  harvesting- 
machine  business  proper,  but  has  also  become  an  important  factor 
in  several  new  lines. 

A  noteworthy  recent  development  of  the  farm-machinery  business 
has  been  the  expansion  of  several  old  concerns  not  previously  engaged 
in  the  harvesting-machine  business  into  that  line  of  manufacture. 
This  development  has  occurred  particularly  with  respect  to  certain 
large  concerns  making  plows  and  a  variety  of  other  lines,  such  as 
Deere  &  Co.,  the  Emerson-Brantingham  Co.,  and  the  Moline  Plow 
Co.,  while  certain  other  important  concerns,  such  as  the  J.  I.  Case 
Threshing  Machine  Co.  and  M.  Rumely  Co.,  according  to  reports, 
have  contemplated  an  expansion  into  the  harvester  business. 

The  expansion  of  these  various  concerns  is  one  of  the  most  signifi- 
cant features  of  the  farm-machinery  industry  to-day,  and  one  involv- 
ing possibilities  of  great  importance.  It  is  important  to  note  that 
these  new  developments  have  been  made  on  the  principle  of  carry- 
ing a  so-called  full  line  of  farm  machinery,  although  it  should  be 
understood  that  no  company,  not  even  the  International  Harvester 
Co.,  has  a  really  complete  line. 

PaOFITS  OF  THE  INTEBNATIONAIi  HABVESTER  CO. 

The  chief  feature  of  the  profits  of  the  International  Harvester  Co. 
IS  the  increase  from  a  low  rate  in  the  early  years  of  the  organization 
to  a  rather  high  rate  in  recent  years,  averaging  about  12^  per  cent 


22 


REPORT   ON    THE   INTERNATIONAL   HARVESTER  CO. 


on  the  net  assets,  as  computed  by  the  Bureau,  for  the  period  1909- 
1911;  figures  for  the  year  1912  are  not  available. 

It  should  be  explained  that  the  Bureau  met  with  exceptional 
difficulties  in  verifying  and  analyzing  the  accounts  of  the  Harvester 
Co.,  because  of  the  fact  that  the  accounts  were  for  several  years  kept 
in  an  extraordinarily  loose  manner,  and  that  the  company,  accord- 
ing to  the  statements  of  its  comptroller,  had  actually  made  no  com- 
plete and  authentic  balance  sheets  prior  to  that  for  December  31, 
1906.  Furthermore,  the  opening  entries  in  respect  to  certain  ac- 
counts, at  least,  were  not  definitely  established  by  the  International 
Harvester  Co.  until  it  made  up  this  1906  balance  sheet  during  the 
first  part  of  1907.  At  the  request  of  the  Bureau,  the  company  pre- 
pared balance  sheets  for  the  earlier  years. 

In  computing  the  net  profits  the  Bureau  made  certain  revisions 
both  of  the  reported  assets  and  profits,  particularly  with  respect  to 
the  opening  entries  on  the  books  and  the  treatment  of  certain  reserves. 
As  already  noted,  the  International  Harvester  Co.  at  an  early  date 
in  Its  operations  readjusted  the  opening  entries  of  inventories,  reduc- 
ing them  from  about  $25,550,000,  the  figure  at  which  they  were  ap- 
praised, to  approximately  $18,155,000,  on  the  ground  that,  the  ap- 
praisal valuations  were  altogether  too  high  for  trading  purposes 
The  Bureau,  it  will  be  recalled,  does  not  accept  this  treatment,  main- 
taming  that  the  same  valuations  should  be  used  both  for  figuring  the 
investment   and    for  computing  profits.     The   Bureau   established 
these  inventories,  after  an  arbitrary  allowance  of  $1,500,000  for  de- 
preciation, which  in  its  opinion  is  liberal,  at  about  $21,230,000.    The 
Bureau    also   treated    differently    certain    expenses,    amounting   to 
$1,780,000,  in  the  fall  of  1902,  charging  these  against  the  profits. 
The  effect  of  these  changes  is  chiefly  shown  in  the  year  1903  (this 
really  covering  a  period  of  15  months),  for  which  the  Bureau's 
computation  shows  a  total  profit  of,  roughly.  $797,000,  whereas  the 
company  figures  a  profit  of  $5,641,000. 

The  Bureau  also  made  certain  revisions  of  the  reserve  accounts  of 
the  company,  particularly  the  contingent  reserve  to  cover  deferred 
profits  on  forward  sales,  the  special  maintenance  reserve,  and  the  de- 
preciation and  extinguishment  reserve. 

The  first  of  these  reserves  amounted  at  the  end  of  1911  to  $2,500,000. 
The  Bureau  takes  the  ground  that  while  this  is  a  provision  which,  as 
a  matter  of  prudence,  the  company  might  set  up,  it  does  not  really 
represent  a  deduction  from  profits,  but  is  merely  surplus  in  another 
form. 

In  the  case  of  the  company's  special  maintenance  reserve,  which 
amounted  at  the  close  of  1911  to  approximately  $1,340,000,  the  Bureau 
IS  of  the  opinion  that  rather  more  than  $1,000,000  really  represented 


SUMMARY. 


23 


profits,  inasmuch  as  to  this  extent  the  expenditures  had  not  yet  been 
iucurred  or  any  liability  definitely  accrued. 

Owing  to  the  excessive  valuations  placed  by  the  company  on  its  ore 
properties,  the  extinguishment  charged  therefor  was  excessive,  and 
consequently  the  Bureau  restored  a  large  portion  thereof  to  earnings. 
In  this  connection,  as  an  interesting  side  light  on  the  company's  ore 
valuations,  it  may  be  noted  that  in  the  first  year  of  its  operations  the 
company  charged  an  extinguishment  of  10  cents  per  ton  on  ore 
mined  from  the  Hawkins  leasehold,  and  the  same  amount  per  ton  on 
that  mined  from  the  Agnew,  whereas  the  extinguishment  subsequently 
charged  amounted  at  the  maximum  to  52J  cents  on  the  Hawkins 
and  37 J  cents  on  the  Agnew.  Certain  other  minor  depreciation 
charges  which  the  Bureau  regarded  as  unwarranted,  and  which  had 
been  charged  against  the  property  account,  were  restored  to  property 
and  to  earnings. 

On  the  other  hand,  certain  amounts  charged  by  the  company  to  in- 
surance and  pension  funds,  parts  of  which,  in  the  opinion  of  the  Bureau, 
might  properly  have  been  i*estored  to  earnings  if  readily  ascertain' 
able,  were  accepted,  as  shown  by  the  company's  books.  The  collec- 
tion expense  reserve  of  $1,000,000  on  receivables  and  depreciation 
reserves  for  bad  debts,  amounting  to  over  $3,000,000,  were  likewise 
accepted  by  the  Bureau. 

RATE   OF   PROFITS    ON    INVESTMENT,   AS   COMPUTED   BY   BUREAU. 

The  net  assets  and  profits  of  the  company  and  the  rate  of  profit 
on  the  net  assets  for  1903-1911,  as  thus  computed  by  the  Bureau  in 
both  cases,  are  shown  in  the  following  table.  The  rates  are  com- 
puted on  the  net  assets  at  the  beginning  of  each  year;  this  is  the 
method  adopted  by  the  company  in  computing  the  rates  on  capital 
and  surplus. 

^iilor^Jc^P  EARNINGS  OF  THE  INTERNATIONAL  HARVESTER  CO  ON  NET  ASSETS 
EXCLUSIVE  OF  GOOD  ^VILL,  AS  COMPUTED  BY  THE  BUREAU,  BY  ^ARS^Q^iml' 


Year 

ending 

Dec.  31— 

Not  assets,  ex- 
clusive of  good 
wllL 

Net  earnings. 

Profit  on 

assets  at 

begin- 

ninK  of 

year. 

Per  cent. 

i     '^'enr 
1  ending 
Dec  31— 

Not  ns«?efs,  ex- 
clusive of  good 
will. 

Net  earnings* 

Profit  on 

assets  at 
begin- 

nintj  of 
year. 

19021 

1109,117.366.08 
106.314,179  00 
107,196,624.97 
109,907.909.12 
112,514,855.99 
116,542,572.83 

1908.... 

1909.... 

1910.... 

j  1911.... 

tI-'2. 522.298,85 
134, 7«' 1, 142. 61 
H4.iSs),739.96 

110,179,726.02 
16,458,843.76 
17,208,597.34 
16,638,703.28 

Per  cent. 

1903 

1904 

1905 

$796,822.92 
5,682,445.97 
7,511,284.15 
7,406,946.87 
8,227,710.84 

'0.73 
5.34 
7.01 
6.74 
7.31 

8.73 
13.43 
12.77 

1906 

Total. 

11.51 

1907 

f 

1,063,486,679.40 

90,111,087.15 

8.47 

This  oovere  15  months,  but  no  change  has  been  made  for  this  period  nor  for  the  average  of  all  the  vMn 
on  that  account.  This  Is  In  harmony  with  the  company's  method  of  treatment.  For  ^n  a^rJio^o!.!?" 
the  exceptionally  low  earnings  of  1903,  see  text. 

79958—13 3 


treatment.    For  an  explanation  ol 


H 


24 


REPORT   ON   THE  INTERNATIONAL  HARVESTER  CO. 


I*-- 


From  the  foregoing  computation  of  the  Bureau  it  appears  that  the 
average  net  earnings  on  the  net  investment  of  the  company  for  the 
nine  years  and  three  months  ended  December  31,  1911,  was  8.5  per 
cent.  The  rate  of  earnings  for  1903  (really  15  months)  was  les.s  than 
1  per  cent,  and  only  in  this  year  does  the  Bureau^s  percentage  differ 
very  markedly  from  that  of  th?  company ;  the  reasons  for  this  differ- 
ence have  been  already  fully  explained,  and  relate  chiefly  to  the 
different  method  of  handling  the  inventory.  Leaving  this  excep- 
tional period  out  of  consideration  the  rate  of  earnings  ranged  from 
5.3  per  cent  in  1904  to  13.4  per  cent  in  1909.  The  average  rate  of 
earnings  for  the  last  three  years,  namely,  1909  to  1911,  inclusive,  was 
12.5  per  cent.  It  will  be  noted  that  the  rate  of  profit  for  1911  was 
about  2  per  cent  lower  than  the  maximum  in  1909.  The  company 
claims  that  on  account  of  the  reduction  of  prices  beginning  in  1912 
its  rate  of  profit  will  prove  to  have  been  lower  in  that  year,  but  it 
has  not  as  yet  completed  its  figures  for  this  period. 

In  the  foregoing  computations  of  profit  the  net  assets  of  the  com- 
pany as  revised  by  the  Bureau  have  been  used  without  any  allowance 
for  good  will.  In  view  of  the  diflSculty  of  establishing  a  fair  valu- 
ation for  the  good  will,  which  might  change  from  year  to  year,  and 
furthermore  in  view  of  the  fact  that  the  company  makes  no  entry 
for  good  will  on  its  books,  any  attempt  to  compute  a  rate  of  earnings 
which  would  include  this  would  be  more  or  less  problematical.  Had 
any  considerable  allowance  been  made  in  the  net  assets  for  good  will, 
the  rate  of  profit  would  necessarily  have  been  lower. 

Hence,  while  the  profits  of  the  International  Harvester  Co.  on  the 
average  for  the  whole  period  of  its  operations  have  not  been  exces- 
sive, the  profits  for  the  three-year  period,  1909  to  1911,  inclusive, 
have  been  distinctly  high.  In  judging  of  the  reasonableness  of  this 
rate  of  profit  it  is  proper  to  consider  the  fact  that  the  risk  of  the 
company's  business  is  comparatively  small,  owing  to  its  world-wide 
character,  which  to  a  large  degree  is  an  insurance  against  the  effects 
of  local  disturbances  of  business  prosperity.  It  is  also  important  to 
bear  in  mind  the  fact  that  the  business  rests  in  part  on  a  monopolistic 
basis,  which  not  only  tends  to  reduce  the  element  of  risk,  but  also 
makes  it  desirable  from  a  public  standpoint  that  the  rate  of  profit 
should  not  be  higher  than  a  reasonable  return  to  the  capital  invested. 

For  purposes  of  comparison,  the  net  earnings  as  computed  by  the 
International  Harvester  Co.  itself  and  the  ratio  of  these  earnings  to 
the  capital  stock  and  surplus  are  shown  in  the  table  following. 


SUMMARY. 


Co 


New   ^.-^~k 


RATE  OP  NET  EARNINGS  OF  INTERNATIONAL  HARVESTER  CO.  ON  CAPITAL  STOCK 
AND  SURPLUS,  AS  SHOWN  BY  COMPANY'S  ACCOUNTS,  BY  YEARS,  1903-1911. 


Year. 

Net  earnings. 

Rate  of  net 

earnings  to 

capital  stock 

and  surplus 

at  beginning 

of  year. 

Year. 

NeteamingB. 

Rate  of  net 

eamin^<!  to 

capital  stock 

and  surplus 

at  beginning 

of  year. 

1903 

•5,641,  ISa  61 
5,658,534.68 

4.70 
4.64 
6.08 
5.85 
6.31 
6.73 

1900 

$14,892,740.21 
16,084,819.19 
15,521,397.89 

10.8ft 

10.91 

9.9& 

1904 

1910 

1905 

7,479,187.36 

1911 

1906 

7,346,947.32 
8,080,457.51 
8,885,682.13 

Total 

1907 

89,590,946.90 

7.62 

1908 

1 

ErrECT  OF  bureau's  revision  of  ASSETS  AND  EARNINGS  ON  SURPLUS. 

In  the  course  of  operations  a  large  part  of  the  net  earnings  of  the 
company  were  left  in  the  business  and  not  distributed  in  dividends, 
so  that  by  the  end  of  1908  all  original  deficiency  in  physical  assets, 
compared  with  capital  stock,  according  to  the  Bureau's  computations, 
had  been  wiped  out  and  a  surplus  balance  established  of  $2,522,- 
298.85.  In  1910  the  capital  stock  was  increased,  as  already  stated, 
to  $140,000,000,  and  at  the  end  of  1911  a  surplus  existed,  according 
to  the  Bureau's  computations,  of  $13,028,443.23,  exclusive  of  good 
will.  This  surplus  may  be  compared  with  the  surplus  shown  by  the 
balance  sheet  of  the  company  for  December  31,  1911,  of  $23,390,- 
946.90,  which  is  also  exclusive  of  good  will. 

The  difference  is  the  net  result  of  the  Bureau's  reduction  of  the 
assets  on  the  one  hand  and  its  reduction  of  the  reserves  on  the  other. 
The  Bureau  has  added  nothing  for  subsequent  appreciation  which 
doubtless  would  be  necessary  if  a  fair  appraisal  were  made  at  the 
present  time. 

PROFITS  IN  PARTICULAR  LINES  AND  IN  EXPORT  TRADE. 

A  noteworthy  feature  of  the  business  of  the  company  is  that  the 
rate  of  profit,  whether  on  sales  or  on  investment^  for  the  highly 
monopolistic  lines — that  is,  grain  and  grass  harvesting  machines — is 
very  much  higher  than  the  corresponding  rates  for  several  of  the 
important  new  lines,  such  as  wagons  and  spreaders,  where  the  com- 
pany encounters  a  greater  degree  of  competition,  and  the  same  is 
true  of  twine.  Thus,  the  rate  of  return  on  wagons,  in  which  the 
company's  percentage  of  the  business  done  is  as  yet  relatively  low,  is 
admittedly  much  less  than  in  the  monopolistic  lines;  and  even  in* 
manure  spreaders,  where  the  company  does  approximately  one-half 
the  business  in  the  United  States,  the  profits  are  comparatively  low, 
probably  due  to  the  aggressive  sales  policy  adopted  by  the  company^ 


26 


REPORT  ON   THE  INTERNATIONAL  HARVESTER  CO. 


For  example,  the  company's  own  statements  show  that  its  profits 
on  grain  machines  in  the  United  States  in  the  years  1910  and  1911 
averaged  over  20  per  cent  on  net  proceeds  of  sales  (not  investment), 
while  the  profits  on  farm  wagons  and  manure  spreaders  in  the  United 
States  (again  based  on  net  proceeds  of  sales)  were  slightly  less  than 
10  per  cent.  A  similar  disproportion,  moreover,  is  found  in  the 
rates  of  profit  on  investment  as  computed  by  the  company.  For 
twine  the  rate  of  return  on  net  sales  in  1910  and  1911  was  only  a 
little  above  7  per  cent,  while  for  1910  alone  it  was  less  than  2  per 
cent  (again  on  net  sales),  but  this  low  rate  was  due  to  exceptionally 
large  purchases  of  fiber  by  the  company  at  high  prices  during  1909. 
It  may  be  noted  that  the  rate  of  profits  on  wagons  alone  is  admittedly 
much  lower  than  that  on  manure  spreaders;  the  company  claims, 
moreover,  that  the  rate  on  wagons  is  lower  than  on  any  other  line 
manufactured  by  it. 

Comparing  the  foreign  business  of  the  International  Harvester 
Co.  with  the  domestic  business,  there  are  comparatively  few  excep- 
tions, apparently,  to  the  statement  that  the  prices  to  the  retail  dealer 
or  to  the  farmer  are  higher  abroad  than  in  the  domestic  market.  This 
is  due  largely  to  the  fact  that  the  business  in  foreign  markets  must 
bear  a  large  expense  for  freight  and  generally  for  duty,  while  the 
selling  expenses  likewise  are  often  high.  The  only  proper  basis  of 
comparison  for  the  returns  to  the  company  is  found  in  the  net  price 
received  at  the  factory  in  the  United  States,  due  account  also  being 
taken  of  the  extra  cost  of  packing  or  other  extra  costs  of  machines 
made  for  export.  The  company  maintains  that  its  net  returns  on 
this  basis  are  higher  for  the  export  than  for  the  domestic  trade,  but  its 
own  accounts  show  that  this  is  by  no  means  universally  the  case. 

PBODUCTIVE   EFFICIENCY   AND   FINANCIAL   BESOXTBCES. 

Cost  of  production. — ^The  International  Harvester  Co.,  generally 
speaking,  has  an  advantage  over  independent  manufacturers  with 
respect  to  the  cost  of  production  of  its  machines.  This  is  espe- 
cially marked  in  the  case  of  grain  binders,  the  most  important  of  the 
harvesting  machines.  Thus,  the  average  factory  cost  of  binders  for 
the  International  Harvester  Co.  at  its  domestic  plants  for  the  two 
years,  1910  and  1911  combined,  was  $56.32,  and  ranged  from  $54.11 
to  $73.78  at  the  different  plants.  While  the  company  produces  most 
of  the  iron  and  steel  required — on  which  its  subsidiary  steel  company 
makes  a  very  large  profit — the  cost  of  these  materials  to  its  im- 
plement plants  is  based  on  prevailing  market  prices,  so  that  its  costs 
in  this  respect  are  comparable  with  those  of  the  independent  pro- 
ducers. For  the  four  independent  companies  that  reported  to  the 
Bureau  the  cost  of  their  binders,  the  average  factory  cost  for  the 


SUMMARY. 


27 


same  period  as  computed  from  the  data  reported  by  them  was  $70.83. 
There  was  a  wide  range  of  cost  among  the  four  independent  concerns, 
but  only  two  of  them  showed  a  materially  lower  cost  than  the  highest 
cost  of  the  International  Harvester  Co.  While  differences  in  the 
style  of  construction  of  different  makes  of  binders  undoubtedly  ex- 
plain some  of  these  differences  in  the  cost,  the  chief  reasons  therefor 
were  differences  in  economy  of  production,  in  which  the  Interna- 
tional Harvester  Co.  has  a  large  advantage  on  account  of  its  great 
volume  of  output,  at  least  at  its  McCormick  and  Deering  plants. 

These  figures  of  factory  costs  do  not  take  account  of  general  and 
miscellaneous  expenses,  which  are  not  ordinarily  reckoned  in  the 
costs  of  machines  at  the  factories,  nor  for  a  much  heavier  selling  ex- 
pense which  for  binders  sometimes  amounts  to  $20  or  even  $25  per 
machine.  General  and  miscellaneous  expenditures  were  relatively 
much  heavier  for  the  independent  companies  than  for  the  Interna- 
tional Harvester  Co.,  chiefly  on  account  of  great  differences  in  volume 
of  business,  though  possibly  due  also  to  differences  in  methods  of 
keeping  cost  accounts.  They  may  properly  be  grouped  with  manu- 
facturing costs  for  the  purpose  of  this  comparison.  If  these  ex- 
penditures are  prorated  over  the  cost  of  production,  both  for  the 
International  Harvester  Co.  and  the  independents,  the  average  cost 
of  binders  for  the  International  Harvester  Co.  becomes  $58.57,  and 
for  the  four  independents  $76.18. 

A  proper  understanding  of  these  relations  of  cost  of  production  to 
the  competitive  position  of  the  independent  binder  manufacturers 
requires  consideration  also  of  the  question  of  selling  expense.  The 
selling  expense  per  binder  for  the  International  Harvester  Co.  is 
considerably  higher  than  the  average  selling  expense  of  the  inde- 
pendents, and  this  fact  partly  compensates  the  latter  for  their  higher 
average  costs  of  production.  Nevertheless  the  margin  of  profit  be- 
tween prices  and  cost  of  production  and  selling  expense  combined 
IS  markedly  lower  for  the  independents  than  for  the  International 
Harvester  Co.  Apparently  the  relatively  high  selling  expense  of  the 
International  Harvester  Co.  is  due  to  the  policy  of  maintaining  a 
very  elaborate  selling  organization,  which  gives  it  a  strong  hold  on 
the  trade  and  helps  to  secure  to  it  a  large  volume  of  business. 
Apparently  it  is  the  company's  policy  thus  to  maintain  an  expensive 
selling  organization  to  push  the  sale  of  its  goods  rather  than  reduce 
prices  on  some  of  its  most  important  lines,  particularly  harvesting 
machines. 

Similarly  in  the  case  of  mowers  and  rakes,  for  which  the  Bureau 
had  sufficient  data  for  comparing  the  costs  of  the  International  Har- 
vester Co.  with  those  of  independents,  it  was  found  that  the  average 
cost  of  manufacture  at  the  plants  of  the  International  Harvester  Co. 


28 


KEPOBT  ON  THE  INTEBNATIONAL  HABVESTEE  CO. 


\,    J 


for  the  years  1910  and  1911  combined  was  lower  than  the  average 
cost  of  the  independents  reporting.  Prorating  general  and  miscel- 
laneous expense  over  the  factory  cost  of  these  machines  the  advantage 
of  the  International  Harvester  Co.  in  this  respect  over  the  inde- 
pendents was  even  greater. 

Again  for  some  of  the  newer  lines,  data  secured  by  the  Bureau 
indicated  some  advantage  for  the  International  Harvester  Co.  in 
cost  of  production,  but  the  data  were  not  sufficient  to  be  conclusive. 

The  foregoing  comparisons  of  production  costs  indicate  one  of 
the  most  important  advantages  enjoyed  by  the  International  Har-( 
vester  Co.  The  striking  advantage  it  has  with  respect  to  cost  of  pro- 
duction of  binders,  taken  in  connection  with  the  great  importance  of 
this  machine  in  the  farm- implement  trade,  is  one  of  its  chief  elements 
of  power. 

Financial  resources.— Another  chief  element  of  strength  of  the 
International  Harvester  Co.  is  the  i)ossession  through  combination, 
of  large  financial  resources.  This  is  reflected  principally  in  three 
ways:  First,  the  ability  to  reap  the  advantages  of  large-scale  produc- 
tion already  described;  second,  the  ability  to  carry  a  full  line  and 
maintain  an  elaborate  selling  organization ;  third,  the  ability  to  grant 
long  terms  of  credit. 

Most  of  the  concerns  which  compete  with  the  International  Har- 
vester Co.  are  not  full-line  concerns.  Those  which  make  harvesting 
machines  in  most  cases  do  not  produce  other  lines  to  an  important 
extent.  Again,  most  of  those  which  make  other  kinds  of  farm 
machines  have  only  a  few  lines,  and  sometimes  only  one.  On  the 
other  hand,  there  are  three  large  full-line  companies,  the  operations 
of  which,  in  this  connection,  are  compared  with  the  International 
Harvester  Co.,  namely,  Deere  &  Co.,  Emerson-Brantingham  Co.,  and 
Moline  Plow  Co.  Of  these  three  full-line  houses,  Deere  &  Co.  was 
distinctly  the  most  important,  from  the  point  of  view  of  financial 
resources,  in  1910  and  1911,  but  even  this  company  was  not  in  the 
same  class  with  the  International  Harvester  Co.  in  this  respect. 
Those  competitors 'of  the  International  Harvester  Co.  which  did  not 
carry  a  full  line  were,  in  most  instances,  small. 

The  advantage  of  relatively  low  costs  of  manufacture  has  already 
been  shown  above,  and  undoubtedly  rests  chiefly  in  large-scale  pro- 
duction. 

Except  possibly  for  the  three  full-line  companies  mentioned  above, 
the  International  Harvester  Co.  enjoyed  a  great  advantage  with  re- 
spect to  the  distribution  of  similar  kinds  of  implements,  in  so  far 
as  the  methods  of  distribution  employed  were  similar.  There  are 
generally  great  differences  in  the  selling  expense  of  different  kinds 
of  machines,  owing  to  different  methods  and  customs  regarding  sale 


SUMMARY. 


29 


and  distribution,  these  being  partly  due  to  the  technical  require- 
ments of  the  business.  Custom  has  generally  established  a  more 
elaborate  system  of  distribution  for  harvesting  machines  than  for 
tillage  implements,  while  the  character  of  the  goods  themselves  and 
the  necessity  for  "  setting  up,"  etc.,  in  the  case  of  harvesting  ma- 
chines involves  a  greater  expense  than  for  most  other  lines.  While 
nearly  all  companies  engaged  in  the  distribution  of  certain  harvest- 
ing machines  utilize  an  elaborate  organization  for  distribution,  full- 
line  companies  with  great  financial  resources  are,  to  a  considerable 
extent,  able  to  apply  the  same  system  to  other  lines,  such  as  manure 
spreaders,  engines,  and  wagons.  While  this  undoubtedly  increases 
their  actual  outlay  for  selling  expense  per  unit  in  these  lines,  in 
so  far  as  they  eliminate  the  jobber,  they  obtain  thereby  a  higher  price, 
generally,  for  the  goods.  Moreover,  they  arc  thereby  enabled  to 
obtain  a  much  stronger  hold  on  the  trade;  for  example,* by  selling 
directly  to  the  local  dealer  instead  of  to  the  jobber,  and,  further- 
more, by  getting  in  direct  contact  with  the  farmer,  through  the 
^employment  of  canvassers  and  other  salesmen. 

The  granting  of  long  terms  of  credit  was  originally  developed  in 
the  harvesting-machine  industry  on  account  of  the  general  inability 
of  farmers  to  purchase  expensive  machines,  like  binders,  for  cash, 
but  it  has  been  continued,  to  a  certain  extent  at  least,  as  a  special 
means  of  getting  trade  by  those  concerns  which  had  ample  financial 
resources.  Moreover,  it  has  been  extended  by  them  to  other  lines 
of  farm  implements  of  a  less  expensive  character,  in  which  this  cus- 
tom was  not  developed  until  a  comparatively  recent  time. 

The  International  Harvester  Co.,  which,  through  combination, 
acquired  extraordinary  financial  resources,  not  only  perpetuated  the 
system  of  selling  harvesting  machines  on  long  terms  of  credit,  but, 
more  conspicuously  than  any  other  concern,  has  extended  this  system 
to  its  new  lines.  This  system  of  selling  these  new  lines  on  long 
terms  of  credit  has  made  it  difficult  for  the  manufacturers  of  such 
lines,  except  possibly  other  full-line  concerns,  to  meet  its  competi- 
tion, and  is  the  principal  complaint  which  they  make  regarding  the 
present  conditions  of  business.  Representatives  of  the  International 
Harvester  Co.  claim  that  its  leading  competitors  grant  equally  long 
credits  and  declare  that  its  policy  is  to  develop  as  far  and  as  rapidly 
as  possible  the  system  of  cash  sales,  that  is,  cash  payment  in  the  same 
season  as  the  goods  are  purchased,  and  that  discounts  for  cash  are 
allowed  for  this  reason.  Wliile  in  some  localities  there  has  been  a 
great  increase  in  the  proportion  of  cash  sales,  nevertheless,  taking  the 
business  of  the  International  Harvester  Co.  as  a  whole,  it  appears 
that  the  proportion  of  sales  on  long  credit  (i.  e.,  one  or  more  years) 
to  total  sales  was  higher  in  1911  than  at  the  beginning  of  business. 


30 


»t 


REPORT  ON  THE  INTERNATIONAL  HARVESTER  CO. 


This  increase  in  the  proportion  of  credit  sales  is  partly  due,  at  least 
to  the  application  of  long  credits  to  the  new  lines  of  goods  for  which 
they  were  formerly  uncommon. 

io^"l'  ^''"'P^^^'^S  1^^4  (no  data  for  1903  being  available)  with 
1911,  the  proportion  of  credit  sales  to  total  sales  in  the  United  States 
was  31.1  per  cent  in  1904,  while  in  1911  it  had  increased  to  35.8  per 
cent.  Inasmuch  as  there  was  a  decrease  in  the  harvesting-machine 
business  as  compared  with  the  total  business,  this  fact  indicates  the 
extensive  use  of  credit  in  new  lines. 

Furthermore,  while  notes  maturing  in  one  year  showed  a  decrease 
as  between  1904  and  1911,  namely,  from  34.7  per  cent  to  28.9  per  cent 
as  compared  with  the  total  of  notes  received  in  those  years,  the  two- 
year  notes  showed  a  large  increase,  namely,  from  48.0  per  cent  to  64.2 
per  cent.  On  the  other  hand,  the  notes  maturing  in  three  and  four 
years  showed  marked  decreases,  namely,  from  14.4  per  cent  to  6  5 
per  cent  and  from  2.9  per  cent  to  0.4  per  cent,  respectively,  from  1904 
to  1911.  It  is  evident,  however,  that  these  long-term  notes  covered 
but  a  small  proportion  of  the  total  business  done  on  credit. 

The  International  Harvester  Co.  is  enabled  to  pursue  this  policy, 
as  already  stated,  because  of  the  large  resources  it  acquired  through 
combination,  and  furthermore,  it  has  been  aided  therein  by  financial 
support  of  an  exceptional  character  through  its  connection  with 
J.  P.  Morgan  &  Co.,  its  fiscal  agents.  The  company  has  also  secured 
large  loans  from  John  D.  Rockefeller,  father-in-law  of  one  of  the 
McCormicks. 

COMPETITIVE  METHODS  OF  INTEBNATIONAL  HABVESTEB  CO. 

While,  as  just  shown,  the  main  source  of  the  International  Har- 
vester Co.'s  power  was  the  consolidation  of  competing  manufacturers 
and  the  accompanying  increase  in  financial  resources,  the  company's 
position  in  the  industry  has  been  maintained  to  some  extent  by 
objectionable  competitive  methods. 

In  discussing  the  competitive  methods  of  the  company  it  should 
be  recognized  that  some  practices  which  might  be  regarded  with 
indifference  if  there  were  a  number  of  competitors  of  substantially 
equal  size  and  power  may  become  objectionable  when  one  competitor 
far  outranks  not  only  its  nearest  rival,  but  practically  all  rivals  com- 
bined,  as  is  true  of  the  International  Harvester  Co.  so  far  as  several 
of  its  most  important  lines  are  concerned. 

It  should  also  be  observed  that  during  the  first  two  years  of  its 
operations  the  company  was  badly  organized,  and  that  instead  of  a 
harmonious  policy,  "  divisions "  corresponding  to  the  five  old  con- 
cerns acquired  were  maintained,  and  that  under  this  arrangement 
various  objectionable  practices  prevailed,  some  of  which  appear  to 
have  been  subsequently  abandoned.    At  the  same  time,  there  has  con- 


BUMMARY. 


81 


tinued  to  be  a  rather  general  complaint  among  dealers,  and  competing 
manufacturers  as  well,  against  the  methods  employed  by  the  company. 

In  the  course  of  the  Bureau's  investigation,  its  agents  visited  over 
800  retail  dealers  at  some  600  towns  scattered  through  27  States. 
This  probably  represented  fully  76  per  cent  of  the  total  number  of 
active  dealers  at  these  particular  points.  Effort  was  made  to  secure 
as  representative  statements  as  possible.  The  results  were  approxi- 
mately as  follows:  Twenty-five  per  cent  favorable;  20  per  cent  non- 
committal ;  50  per  cent  specifically  imf avorable ;  6  per  cent  unfavor- 
able without  specific  complaint. 

Naturally  it  is  to  be  expected  that  a  considerable  portion  of  those 
doing  business  with  a  large  corporation  will  be  favorably  disposed 
toward  it.  Indeed,  this  should  be  the  normal  condition.  The 
fact,  therefore,  that  one-half  of  the  total  number  of  dealers 
interviewed  made  some  specific  statement  involving  adverse  criti- 
cism of  the  methods  of  the  company  shows  beyond  doubt  that  there 
must  be  some  substantial  ground  for  criticism;  a  number  of  these 
complaints,  however,  in  the  opinion  of  the  Bureau,  were  unimportant. 

In  addition  to  dealers,  the  Bureau's  representatives  saw  the  com- 
peting manufacturers  and  their  general  agents  and  also  various 
implement  jobbers  at  the  chief  jobbing  centers. 

Among  such  objectionable  competitive  methods  here  discussed  are: 

(1)  Maintenance  of  bogus  independent  companies  in  the  early 
years  of  the  company's  operation. 

(2)  Attempts  to  force  dealers  carrying  its  harvesting  machines 
into  carrying  additional  lines  or  certain  International  lines  exclu- 
sively. At  an  earlier  date  the  contracts  of  the  Harvester  company 
contained  an  exclusive  clause  for  harvesting  machines. 

(3)  Efforts  to  secure  an  undue  proportion  of  desirable  dealers  in 
a  given  town  by  giving  only  one  of  its  several  brands  of  harvesting 
machines  to  a  dealer,  thus  tending  to  restrict  the  outlet  for  competi- 
tive goods. 

(4)  Use  of  "  suggested  price  "  lists,  tending  to  influence  the  final 
retail  price;  earlier  the  contracts  themselves  provided  for  fixing  of 
retail  prices  by  the  company. 

(6)  Occasional  discrimination  in  prices  and  terms. 

(6)  Misrepresentations  by  salesmen  regarding  competitors. 

PRETENDED  COMPETmON  IN  EARLY  TEARS. 

So  far  as  the  maintenance  of  bogus  independent  companies  is  con- 
cerned, this  has  already  been  referred  to  in  discussing  the  acquisi- 
tions of  the  Osborne,  Minnie,  Aultman-Miller  and  Keystone  concerns. 
The  impropriety  of  continuing  the  operation  of  these  companies  under 
the  old  names,  without  disclosing  the  real  ownership,  after  they  had 


82 


HEPOBT  ON  THE  INTERNATIONAL  HABVESTEB  CO. 


been  acquired  by  the  International  Harvester  Co.,  is  obvious.  Some 
of  these  concerns  were  openly  advertised  as  independent.  It  should 
be  repeated  that  in  some  cases  it  is  alleged  that  the  ownership  was 
concealed  merely  to  facilitate  the  liquidation  of  the  old  concern,  but 
the  Bureau  does  not  regard  this  as  a  justification  of  the  practice. 

COERCION  OF  DEALERS  TO  HANDLE  INTERNATIONAL  HARVESTER  CO.  GOODS. 

Exclusive  contract. — In  1905  and  previous  years  the  Harvester 
company's  usual  commission-agency  contract  contained  substantially 
the  following  clause : 

Said  agent  especially  agrees  not  to  accept  the  agency  for  or  to 
be  interested  in  the  sale  of  any  grain  binder,  header,  com  binder, 
busker  and  shredder,  reaper,  mower,  stacker,  sweep  rake,  hay- 
rake  or  hay  tedder,  other  than  those  manufactured  by  the  Inter- 
national Harvester  Company,  either  directly  or  indirectly,  nor 
to  permit  anyone  acting  for  him  as  employee,  agent,  or  partner, 
so  to  do  while  acting  as  agent  for  the  said  company  under  this 
contract,  and  said  agent  agrees  to  pay  said  company  on  demand 
as  liquidated  damages,  twenty-five  dollars  for  each  grain  binder, 
header,  or  corn  binder;  fifty  dollars  for  each  busker  and  shred- 
der; ten  dollars  for  each  mower,  reaper  or  stacker;  five  dollars 
for  each  sweep  rake,  hayrake,  or  hay  tedder  sold  in  violation  of 
this  paragraph  of  this  contract. 

It  is  obvious  that  the  use  of  this  clause  in  the  contract,  even  if 
not  enforced,  would  have  a  powerful  effect  upon  most  dealers. 

It  is  indicative  of  the  real  intent  of  this  clause  that  it  was  elimi- 
nated from  the  contract  after  1905,  when  antitrust  proceedings 
against  the  company  were  threatened  in  several  States.  In  fact,  in 
Texas  the  use  of  this  clause  was  discontinued  as  early  as  October, 
1902.  On  the  other  hand,  it  should  be  noted  that  this  clause  was  cus- 
tomary among  harvesting- machine  companies  prior  to  the  merger 
and  has  been  used  by  some  other  companies  in  the  implement  trade 
even  since  it  was  abandoned  by  the  International  Harvester  Co.  It 
is  much  more  objectionable,  however,  when  used  by  a  concern  which 
has  a  monopolistic  position. 

Exclusive  handling. — ^After  the  elimination  of  the  exclusive 
clause  from  dealers'  contracts,  other  means  were  not  infrequently 
employed  to  secure  the  same  end.  In  a  considerable  number  of  in- 
stances reported  to  the  Bureau,  salesmen  of  the  International  Har- 
vester Co.  endeavored  to  prevent  the  handling  of  a  competitor's  line 
by  threats  to  discontinue  the  dealer's  agency  for  the  International 
Harvester  Co.'s  machines,  and  in  some  instances  canceled  or  discon- 
tinued the  dealer's  agency  when  he  insisted  upon  handling  an  inde- 
pendent line.  The  company  asserts,  however,  that  such  practices  are 
contrary  to  its  policy. 


summary. 


33 


"Full-line"  forcing. — This  complaint  was  a  rather  general  one 
among  the  dealers  interviewed.  Obviously  it  is  difficult  to  say  just 
where  this  practice  of  trying  to  force  dealers  to  take  additional  kinds 
of  products  ceases  to  be  legitimate  competition  and  becomes  objec- 
tionable. The  International  Harvester  Co.,  like  any  other  concern, 
desires  to  push  the  sale  of  its  goods,  and  naturally  is  disposed  to  take 
advantage  of  the  fact  that  it  has  certain  desirable  machines,  in  order 
to  force  the  sale  of  its  newer  lines.  Aside  from  any  question  as  to 
motive,  it  is  apparent  that  any  concern  having  a  monopoly  of  such  an 
article  as  harvesting  machinery  has  an  enormous  advantage  in  forc- 
ing its  entrance  into  new  fields,  and  that  this  advantage  is  very  sus- 
ceptible of  abuse.  There  were  numerous  complaints  that  the  sales- 
men of  the  company  attempted  to  force  dealers  to  take  on  lines  in 
addition  to  those  already  handled,  frequently  under  penalty  of  loss 
of  their  agencies  for  the  company's  harvesting  machines.  Frequently, 
however,  it  appeared  that  these  threats  were  not  carried  out. 

EFFORT  TO  SECURE  UNDUE  PROPORTION  OF  DEALERS. 

As  a  rule  there  are  not  more  than  three  dealers  in  farm  machinerv 
in  an  ordinary  town  in  the  grain  States.  It  is  the  policy  of  the  Inter- 
national Harvester  Co.,  in  general,  to  allow  a  given  dealer  to  handle 
only  one  of  its  several  brands  of  harvesting  machines,  thus  absorbing 
the  services  of  a  large  number  of  these  dealers ;  of  course,  not  all  of 
the  company's  brands  are  handled  in  every  town.  Complaint  is  made 
that  this  tends  to  give  it  such  an  undue  proportion  of  dealers  as  to 
restrict  the  outlet  for  competitors'  goods.  The  company,  however, 
expressly  denies  that  in  adopting  this  policy  of  distributing  its  brands 
it  is  actuated  by  any  desire  to  handicap  its  competitors  in  this  way. 
The  company's  position  on  this  point  is  illustrated  by  the  following 
excerpt  from  testimony  of  the  assistant  general  manager  to  the 
Bureau : 

Q.  I  understand  then  that  your  position  is  that  the  company 
does  not  place  its  brands  in  this  way  for  the  purpose  of  handicap- 
ping its  competitors;  and  you  also  contena  that,  regardless  of 
intent,  the  practical  effect  is  not  to  handicap  your  competitors  ? — 
A.  It  does  not.  Its  sole  purpose  is  to  get  more  active  representa- 
tion of  your  goods,  which  you  can  not  do  if  you  allow  them  to  get 
into  the  hands  of  one  inan  in  a  town.  He  will  not  give  your 
customers  the  same  consideration,  the  same  service,  as  he  will  if 
he  is  handling  a  less  number.  Not  only  do  we  not  try  to  elimi- 
nate them  in  that  way,  but  it  is  a  matter  of  real  benefit  to  us  in 
new  sections  when  a  competitor  will  get  a  real,  live,  active  man  in 
the  trade.  We  sell  more  goods  than  we  could  do  if  we  gave  all 
our  lines  to  one  man  and  tnere  was  not  any  competitor  there. 

However,  it  seems  significant  that  the  record  in  the  Government 
suit  shows  that  in  1903  a  report  of  the  sales  committee  of  the  Inter- 


34 


REPORT  ON   THE  INTERNATIONAL  HARVESTER  CO. 


national  Harvester  Co.  of  America,  which  was  approved  by  the  execu- 
tive committee,  contained  the  following  statement : 

We  believe  that  so  long  as  there  is  competition  it  is  desirable 
for  the  International  I&rvester  Co.  to  maintain  five  selling 
organizations  for  the  purpose  of  getting  the  largest  amount  or 
euoTt  from  the  greatest  number  or  local  agents  without  expense 
to  the  company,  and  for  the  purpose  of  utilizing  in  its  own  busi- 
ness as  much  as  possible  of  the  available  local  agency  material 
rather  than  permit  any  of  it  to  become  available  for  competitors. 

Still  again,  in  1902,  when  the  exclusive  contract  was  discontinued 
in  Texas,  the  executive  committee  of  the  International  Harvester  Co. 
of  America  directed  each  division  of  the  company  "to  discourage 
any  agent  in  Texas  from  handling  more  than  one  brand  of  machine.'^ 

These  oflScial  statements  seem  to  show  conclusively  that  the  dis- 
tribution of  brands  among  various  dealers  in  the  manner  indicated 
was  at  one  time  the  result  of  a  settled  policy  of  the  company  to 
secure  as  many  of  these  dealers  as  it  could  for  its  own  business,  and 
with  a  view  to  embarrassing  competitors.  In  view  of  these  official 
statements,  the  fact  that  the  company  still  distributes  its  brands  in 
this  way  seems  significant.  Practically,  the  supply  of  dealers  even 
in  the  smaller  towns  usually  has  been  sufficient  to  prevent  anything 
like  an  effective  monopoly  of  these  channels  of  distribution,  although 
it  does  appear  that  the  company's  practice  in  this  respect  has  to  some 
extent  handicapped  its  competitors. 

ISSUE  OF  "  SUGGESTED-PRICE  "  LISTS. 

Formerly  the  commission  agency  contracts  of  the  International  Har- 
vester Co.  expressly  provided  for  the  maintenance  of  retail  prices  fixed 
by  the  company.  In  recent  years,  however,  this  clause  has  been  omitted 
from  these  contracts,  and  the  company  now  expressly  disclaims  any 
attempt  to  control  the  retail  price  charged  by  the  dealer.  The  posi- 
tion of  the  International  Harvester  Co.  is  that  dealers  in  farm  ma- 
chinery are  not  strictly  its  agents,  although  generally  so  called,  but 
that  they  are  free  to  do  as  they  like  in  the  matter  of  prices,  subject  to 
the  right  of  the  company  to  cease  dealing  with  them  if  they  adopt 
methods  which  tend  to  injure  its  business  or  demoralize  the  trade. 

The  Bureau  found,  however,  that  following  the  elimination  from 
the  company's  contracts  of  the  clause  relating  to  retail  prices  there 
has  been  a  rather  general  issuance  of  price  lists  in  different  parts  of 
the  country,  usually  by  general  agents  of  the  company,  naming 
so-called  "  suggested  prices  "  to  be  paid  by  the  farmer.  These  price 
lists  are  sometimes  gotten  out  in  rather  elaborate  form,  and  over  the 
name  of  the  International  Harvester  Co.  of  America,  and  they  have 
had  a  rather  wide  circulation  among  dealers.  Representatives  of 
the  Bureau  found  that  such  price  lists  had  been  issued  by  several 
general  agencies  of  the  company  in  recent  years. 


SUMMARY. 


35 


The  assistant  general  manager  of  the  company  explained  these 
price  lists  on  the  ground  that  there  was  a  constant  demand  on  the 
part  of  the  company's  salesmen  for  suggested  prices,  largely  as  a 
matter  of  information  for  the  benefit  of  final  purchasers  who  fre- 
quently made  requests  for. quotations.     In  this  connection  he  said: 

There  is  a  constant  demand  on  the  part  of  our  salesmen  for 
these  suggested  prices.  ♦  ♦  ♦  Some  of  our  men  have  been 
stupid  enough — indiscreet  enough — to  comply  with  this  request 
to  the  extent  of  getting  out  a  "suggested  list.''  I  may  say,  how- 
ever, in  justice  to  them  that  there  was  a  period  along  about 
1904-5  when  that  was  recognized  by  our  counsel  at  the  time  as 
not  being  objectionable.  Later  instructions  were  issued  not  to 
do  it,  as  it  led  to  a  misunderstanding  as  to  what  our  motives  were. 

It  is  obvious  that  the  company  could  immediately  stop  the  issuance 
of  such  lists  if  it  genuinely  desired  to  do  so. 

The  company's  position  is  that  these  lists  have  no  effect  and  are 
not  intended  to  have  any  effect  in  the  direction  of  maintaining  uni- 
form retail  prices.  The  Bureau,  however,  is  of  the  opinion  that  the 
distribution  of  these  lists  tends  to  the  maintenance  of  more  uniform 
retail  prices  by  deterring  dealers  from  making  conce.^ions. 

LOCAL  DISCRIMINATION  IN  PRICES  AND  TERMS. 

The  general  policy  of  the  International  Harvester  Co.  is  one  of 
uniform  prices  to  dealers.  Complaints  were  submitted  to  the  Bureau, 
however,  to  the  effect  that  at  times  it  engages  in  local  price  cutting 
for  purposes  of  competition.  Admissions  of  the  company  show  that 
moderate  concessions  are  rather  frequent.  The  Bureau  found  a  large 
number  of  such  moderate  concessions  and  also  a  limited  number 
of  deep  cuts,  but  the  company  itself  admitted  such  deep  cuts  in  only 
a  very  few  instances.  The  company  specifically  denied  that  its  policy 
is  to  make  deep  cuts  to  injure  competitors.  It  is  obviously  difficult  to 
say  just  where  moderate  concessions  in  prices  cease  to  be  an  ordi- 
nary incident  of  competition  and  become  subject  to  condemnation. 
It  should  be  noted  that  the  laws  of  several  States  in  which  the  In- 
ternational Harvester  Co.  does  business  specifically  provide  against 
local  discrimination  in  prices.  However,  the  Bureau  is  of  the  opinion 
that  such  discrimination  in  prices  has  not  had  a  serious  effect  on  the 
business  of  competitors. 

It  may  be  pointed  out  that  in  some  of  its  newer  lines  the  company 
has  adopted  a  general  policy  of  distinctly  low  prices,  which  appar- 
ently it  is  enabled  to  do  because  of  the  high  prices  it  secures  on  the 
older  lines. 

In  this  connection  there  is  much  complaint  that  the  company  grants 
unusually  long  terms  of  credit  to  purchasers  of  some  of  these  newer 
lines.    One  of  the  competitors  of  the  company  said,  "  The  Interna- 


36 


rr         ' 


REPORT  ON   THE   INTERNATIONAL  HARVESTER  CO. 


tional  Harvester  Co.  sells  terms,  not  harrows."  Other  complaints  as 
to  the  company's  terms  were  made  especially  with  respect  to  manure 
spreaders,  wagons,  and  gasoline  engines.  The  advantage  of  the  Har- 
vester company  in  this  respect,  because  of  its  superior  resources,  is  re- 
ferred to  elsewhere.  This,  however,  is  a  flatter  distinct  from  local 
discrimination,  although,  in  the  opinion  of  the  Bureau,  it  is  more 
serious  in  its  effect  on  competitors  in  the  new  lines,  where  the  propor- 
tion of  the  company's  business  has  been  rapidly  increasing. 

MISREPRESENTATIONS   REGARDING   COMPETITORS. 

Complaint  was  also  made  to  the  Bureau  that  there  has  been  more 
or  less  general  misrepresentation  of  competitors  by  the  salesmen  of 
the  International  Harvester  Co.  While  some  years  ago  there  were 
a  few  such  complaints  involving  misrepresentation  of  the  financial 
standing  of  competitors  by  the  company's  salesmen,  no  recent  com- 
plaints on  this  score  were  received.  The  International  Harvester  Co. 
stated  that  in  the  most  recent  case  for  which  proof  was  submitted  to 
it  the  salesman  was  dismissed.  Recent  complamts  were  chiefly  ta 
the  effect  that  the  salesmen  of  the  International  Harvester  Co.  fre- 
quently represent  that  purchasers  of  competing  harvesting  machines 
will  be  unable  to  secure  repair  parts,  the  implication  being  that  the 
competitors  may  not  continue  in  business.  A  representative  of  the 
International  Harvester  Co.  admitted  that  this  practice  existed  to 
some  extent,  and  said  that  the  company  had  "  used  a  lot  of  time, 
energy,  and  money  trying  to  eliminate  it."  He  contended  that  this 
was  an  inheritance  from  the  bitter  competition  which  preceded  the 
formation  of  the  company.  He  insisted  positively  that  it  was  con- 
trary to  the  policy  of  the  company. 

In  the  opinion  of  the  Bureau  there  is  foundation  for  this  com- 
plaint, but  apparently  the  practice  has  not  resulted  in  seriously 
handicapping  competitors. 

While  notwithstanding  the  various  objectionable  practices  above 
set  forth  the  business  of  the  competitors  of  the  International  Har- 
vester Co.  in  harvesting  machines  has  increased,  obviously  this  is 
no  defense  of  methods  in  themselves  objectionable.  Moreover,  as 
already  shown,  the  International  Harvester  Co.  has  thus  far  sub- 
stantially maintained  its  monopolistic  position  in  the  harvesting- 
machine  business,  while  in  several  of  the  newer  lines  in  which  it  had 
no  interest  at  its  organization  it  has,  in  a  short  period  of  years,  built 
up  its  business  so  rapidly  that  in  some  of  these  it  now  has  a  large 
proportion  of  the  trade,  and  in  one,  manure  spreaders,  a  majority 
of  the  business.  It  is  also  worth  noting  that  the  company's  business 
in  wagons  has  increased  rapidly  in  the  face  of  a  reduction  in  the 
total  demand. 


SUMMARY. 


SOUBCES  OF  THE  COMBINATION'S  POWER. 


37 


Three  principal  factors  appear,  therefore,  to  have  been  chiefly  re- 
sponsible for  the  position  attained  by  the  International  Harvester 
Co.:  (1)  Combination  of  competitors;  (2)  superior  command  of 
capital;  (3)  certain  objectionable  competitive  methods. 

The  prime  source  of  the  company's  power  is  undoubtedly  to  be 
found  in  the  original  combination  of  the  principal  competing  com- 
panies in  the  harvesting-machine  business.  As  already  shown,  the 
company  was  also  able  to  use  its  position  in  this  branch  to  great 
advantage  in  forcing  its  way  into  new  lines. 

Next  to  this  monopolistic  control  of  the  harvesting-machine  busi- 
ness proper  is  the  company's  exceptional  command  of  capital. 

While  its  financial  advantage  has  been  supplemented  by  the  adop- 
tion of  certain  objectionable  competitive  methods,  the  mainspring  of 
its  power  was  the  consolidation  of  the  leading  competitive  factors 
in  Uie  industry. 


COLUMBIA  UNIVERSITY  LIBRARIES 


This  book  is  due  on  the  date  indicated  below,  ur  at  the 
expiration  of  a  definite  period  after  the  date  of  borrowing, 
as  provided  by  the  library  rules  or  by  special  arrang:ement 
with  the  Librarian  in  charge. 


DATE  BORROWED 

DATE  DUE 

DATE  BORROWED 

DATE  DUE 

Ai 

JMft  1  ^  i^(^ 

w 

'^ 

llOV         K     '^ 

-b^c    7 

fjWSWf*    / 

Joi  5 

\ 

1 

^t 

C28     (764)     SOM 

COLUMBIA  UNIVERSITY^ 


0032056141 


D225 
Un33 

Un33 


r-  f^ 


Department  of  Commerce. 


International  Harvester 


Co. 

JAN  9     itM>7 


/isH  o\ViO 

NEH 

SEP  06Wy4 


JUN  2  5  1926 


Bm 


END  OF 

TITLE 


